Metals markets appear to have made up their mind that the global economy is likely to have a V-shaped economic recovery, and that China is already in this happy condition.
The prices of copper, aluminum and iron ore, on exchanges in China and elsewhere, are pointing to a consensus that the worst of the economic hit from the novel coronavirus is over.
Shanghai three-month copper futures traded as high as 49,480 yuan (US$6,999) a tonne on Thursday, within a whisker of the intraday high so far this year of 49,640 yuan, reached on Jan. 17 just as China was tightening its lockdowns to battle the coronavirus.
The Shanghai contract is now up 39 per cent from its low this year of 39,400 yuan on March 23, with traders increasingly confident that China’s demand for the industrial metal is returning amid stimulus measures and the resumption of manufacturing and building activity.
While not quite as impressive as the Shanghai contract, London copper futures have also rallied in recent weeks, reaching as high as US$5,780 a tonne in Asian trading hours on Thursday.
This is up 32.2 per cent from the low this year, struck on March 19, but is still 8.9 per cent below the intraday high of US$6,343 a tonne, reached on Jan. 16.
While there are some concerns over copper ore supplies given the spread of the coronavirus pandemic to producer countries such as Chile and Zambia, the bulk of the gains seem to be coming on hopes of a V-shaped recovery.
There is some evidence of such a recovery in Chinese and global purchasing managers indexes.
China’s official PMI picked up to a three-month high of 50.9 in June, while the private Caixin/Market PMI reached a six-month high of 51.2, both measures comfortably above the 50-level that separates growth from contraction.
The Institute for Supply Management PMI for the United States returned to growth in June, reaching 52.6, and the Eurozone PMI got closer to growth, hitting 47.4 in June, up sharply from May’s 39.4.
The aluminum market has also bought into the V-shaped recovery, with Shanghai three-month futures reaching as high as 13,855 yuan a tonne in Thursday trade, just shy of the peak so far this year of 14,240 yuan on Jan. 17.
They are up 23.4 per cent from the intraday low this year reached on April 2.
London three-month aluminum is also recovering, reaching as much as US$1,624 a tonne in Asian trade on Thursday, up 11.6 per cent since the low so far this year on April 8, but still some 11.5 per cent below the peak of US$1,835 a tonne on Jan. 6.
IRON ORE STRENGTH
In some ways, the standout part of the metals complex this year has been iron ore, the key ingredient to make steel.
The Asian spot price for benchmark 62-per-cent ore, as assessed by commodity price reporting agency Argus, ended at US$99.10 a tonne on Wednesday, up 24.5 per cent since its year-to-date low of US$79.60 on March 23.
Iron ore has the duel bullish story of strong demand from China, which buys about two-thirds of global seaborne supplies, and worries over supply from No. 2 exporter Brazil, one of the countries worst hit by the coronavirus pandemic.
It’s always guesswork to say which is the stronger influence, the demand pull from China or supply concerns, but the demand factors may hold the upper hand given that exports from Brazil don’t appear to have been much affected as yet.
The unanswered question is whether metals markets are calling the global economy correctly, and the V-shaped recovery is indeed the most likely outcome.
With the coronavirus still raging across parts of the world, particularly in the United States and some South American countries, it’s still far from being counted out as a factor.
Another issue worth watching is what happens when the initial support measures enacted in many countries come to an end, particularly those measures related to jobs.
If millions of people are thrown out of work in the second half of the year as support payments end – or are wound back – the subsequent loss of consumer and business confidence may kibosh any nascent economic recovery.
For now, the market seems to think the pattern of the 2008 global financial crisis may be repeated, insofar as a China-led recovery that is metals intensive.
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