Copper has been given the delineation of Dr. Copper and rightly so, as it is perhaps the best economic metric for China's economy growth as it represents the basis of its economy via its property market.
This proved to be a great indicator back in the early 2000s as China was focused on an urban and industrialization that sucked up all the world's basic resources that went towards its urban expansion. This meant copper, iron ore and steel to name a few. Iron ore, a slightly smaller market, but still representative of economic growth in China as it is the raw material used to make steel.
Iron ore has rallied 50% since its October lows vs. copper that rallied 25% as it touched close to $9500/tonne and has since then retreated. Iron ore got to as high as 900 yuan/tonne and today has given off about 10% trading at 815 Yuan/tonne.
As China had plans to reopen post being shut for almost two years into Covid, everyone assumed that would create a demand once again for these commodities as growth would come back in full steam. Low and behold China did announce infrastructure projects into its reopening and that got the speculators excited to chase both copper and iron ore in anticipation of that demand.
Iron ore demand did pick up in the first two months of the year with official data showing imports of 194.2 million tonnes in the first two months of the year, up 7.3% from the same period a year earlier. Refinitiv estimating arrivals of around 103 million tonnes, so the rate of change for the first quarter has been good.
But China's focus is not on infrastructure growth and urbanization, it is more focused on the domestic consumer, but needless to say it is the fastest way to get GDP numbers higher as China needed to as they reopened. They still have a GDP target of 5% to meet and the easiest way to get there is to sporadically pump money into infrastructure to see the best results. It is far from a secular theme. Also, China will be implementing a policy to cut steel output by 2.5% this year from last year and this will mean less demand for iron ore.
Copper has since retraced its rally as it trades below $9000/tonne today. There is much debate between financial and actual physical demand. But one thing is clear, China cannot alone save the world especially if the end market is falling deeper into a recession. It is not an if but when a recession hits. Debates can continue whether it will be a soft or hard one, but after the excesses of the post Covid world, one can only assume the latter.
The banking woes of the past few weeks have made this outcome an almost certainty as banks will now be forced to hold back lending and reserves, not easily handing them out as they did back when rates were close to 0%. The bond market is all too aware of this as the two year vs. the ten year yield curve steepens after being as low as -120 bps to now trading close to -30bps. It seems that the equity market did not get the memo yet, but it soon will.
