China’s economic recovery was one of the great hopes of a global economy that was being marred by uncertainty, inflation and disruptive growth. A few weeks ago, however, the first data began to appear showing a significant loss in Chinese activity. This bad omen seems to be confirmed by an almost real-time indicator of the Asian giant’s economy: the price and demand for copper. The price of this metal has entered a market structure known as contango and occurs when there is an excess of some raw material (in this case copper) in the physical or spot market.
The price of copper rose in January with expectations generated by the large dragon’s excitement. The only income for the life of the nation with 1,300 million inhabitants – with the end of covid no measures – in copper rise almost 13%, from the smallest to the largest in January, reaching more than 9,300 dollars per ton. on the Metal Exchange (LME).
On the other hand, he was struck. The economy deflated very quickly, while the government’s stimulus proposals remain vague (made by policymakers at the People’s Bank of China or within the Communist Party) that are not implemented.
Data pending in May, the indices published in April in China fell like a “jug of cold water” in the expectations of the “Asian giant” and the global economy, which this year depended heavily (more if possible as other exercises) on Chinese growth.
Industrial production fell by 0.5% in April compared to the previous month. Year on year it grew by only 5.6%, despite the huge base effect to support this data, since last year a large part of the industrial zones was exposed to the transmission at that time. “This figure is well below the market’s expected 10.9% yoy and seems subdued compared to the pre-pandemic trend. The current data confirms the weakness of the industry seen in the PMI readings.
“Perhaps China is slowly coming out of winter after no food his policies, but his economic data – especially critical sectors for the demand for raw materials – remain irregular. Taken together, the company is still not strong enough to support the rise in the price of copper (and the weakness in Europe and the US does not help),” says Michael Widmer, a commodity strategist. Bank of America (BofA)).
“In China, with new orders/inventor systems, the bearish forward index, returns to levels that imply flat year-on-year copper prices. The same is true of the credit boost, which has picked up from the lows, but continues to show the selective nature of the official support of the economy,” explains the bank’s experts in a note for American clients.
There is literature that proves the relationship between the price of air and the progress of the economy countries like China or Indiawhose thrifts are still very intensive in the use of this material. In order to produce any extra unit of GDP, a larger supply of copper and other metals must be used than, for example, developed countries.
All in all, the price of copper has not seen a near roar since November 2022. The metal fell to a level before China’s restrictions due to covid-19 were lifted. “Copper is one of the biggest beneficiaries after China’s recession, given the expectation that China’s support will boost real market demand for industrial metals,” he explains. Ewa Manthey, ING Economist in the note After expectations, China’s rock steady demand for this metal was weaker than expected, despite entering a country known for its peak construction season.
Weak demand and uncertainty
A JP Morgan analyst said in a note to clients this week that he expects some weakness in metal prices through part of 2023, “as Chinese demand remains subdued and broader macroeconomic uncertainty weighs on market appetite.”
However, JP Morgan strategists admit that these lower prices have also prompted increased inquiries from structurally bullish, long-term investors who believe that a fund can be built on the price of these metals. “Although subdued and disappointing against more bullish expectations earlier in the year, China’s demand for base metals tends to maintain a fairly firm pace… Our base case expects China to buy enough copper at a price of $8,000 per ton, but if the economic slowdown is much sharper, the next area the firm’s support could be around $7,400-7,500 per ton,” the JP Morgan report admits.
Although surveys of “longs” in air betting have risen – the data now offer the opposite view. Developers say one thing, but they do the opposite. Speculators on the LME were reducing bullish bets: the net long position is now the lowest in more than 19 weeks, at 38,416 contracts, according to exchange-traded futures and options data.
On the other hand, Goldman Sachs strategists on Sunday forecast for average copper prices this year from $9,750 per ton to $8,698. Metals have “recession prices,” shows data gathered from economic times.
Higher interest rates made banks wary of excess metal supply due to high financing costs dramatic structure “supercontango” in which the prices of the metal at the instant of delivery are much cheaper than in the future. As a result, more metals end up being stored in LME warehouses, which act as the latest markets.
The price of spot copper, a body of copper for immediate delivery, is about $7,900, while the three-month price is close to $8,000 and futures for delivery in 2024 have reached $8,070, according to the SCI website. A market with this type of structure -contango- stops when there is an immediate excess of supply, either because too much of the raw material in question is produced or because demand has fallen. In this case, it indicates that everything must be connected to him “Receipts are being emptied in China”according to analysts at Goldman Sachs.
However, trends in raw materials are not usually eternal – just as it was not in 2021 when the world seemed to be going out of copper. A price drop creates incentives for builders and other metal buyers to build up inventory or make larger purchases. “We believe that the correction and pessimism are correct in the short term, but we are optimistic in the medium term. We have lowered the expectation of refined supply growth to 1.8% in 2023 (from 2.9%) due to supply disruptions, while we are targeting supply growth of 3.5% in 2024, as new mines coming online and existing supply disruptions being resolved, we have submitted our global copper demand growth estimates to 2.7% this year (from 3.1%) and 3.3% in 2024. Overall, we continue to see a market shortfall of 105,000 tons (-0.4% of demand annual) in 2023 and 54,000 tons (-0.2% of annual demand) in 2024”.
But BofA uses their own model. “We measure the demand for copper through two models: apparent consumption (refined production + imports – exports + change in inventories) and underlying purchases (the weight of year-over-year sectoral growth from each part of the underlying activity). Each of these analyzes confirms that demand is growing, that said, We also confirm the weak purchase at the end of the first quarter and in the second This, together with the sluggishness of the activity outside China, suggests that the red metal can remain in the round of fluctuations for the time being”, Widmer developed. In UBS they put a ton of copper at the end of the year and $9500. 10,000 at the end of the first semester of 2024 .
