Copper surges on supply threat as iron ore shows economic risks

Prices for two of the world’s most important mined commodities are diverging quickly, with copper rallying above US$9,000 a tonne as supply cuts hit the market and iron ore sinking as demand headwinds mount. 

Copper has surged 5 per cent this past week, ending a months-long spell of inertia, as investors hone in on risks to supply at mines and smelters. Tentatively, traders are also warming to the idea that the worst of a global downturn is in the past, particularly for metals such as copper that are increasingly used in electric vehicles and renewables.

But signs of the headwinds in traditional industrial sectors are still plain to see in the iron ore market, where futures fell below US$100 a tonne for the first time in seven months on Friday (Mar 15). Investors are betting that China’s years-long property crisis will run through 2024, keeping a lid on demand. 

The steelmaking ingredient has shed more than 30 per cent since early January as hopes of a meaningful revival in construction activity faded. Loss-making steel mills are buying less ore, and stockpiles are piling up at Chinese ports.

Sentiment has soured since the recent National People’s Congress in Beijing, where policymakers set an ambitious 5 per cent goal for economic growth, but offered few new measures that would boost infrastructure or other construction-intensive sectors. The latest drop will embolden those who believe that the effects of President Xi Jinping’s property crackdown still have significant room to run, and that last year’s rally in iron ore may have been a false dawn.

On Friday, there were fresh signs that weakness in China’s industrial economy is hitting the copper market too, with stockpiles tracked by the Shanghai Futures Exchange (SHFE) surging to the highest level since the early days of the pandemic. The hope is that headwinds in traditional industrial areas will be offset by an ongoing surge in usage in electric vehicles and renewables.

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Further afield, industrial conditions in Europe and the US still look soft, but there’s growing optimism about copper usage in India, where rising investment has helped fuel blowout growth rates of more than 8 per cent – making it the fastest-growing major economy. 

For now, the main catalyst fuelling copper’s rally is an unexpected tightening in global mine supplies. That’s been driven mainly by last year’s closure of a giant mine in Panama, but there are also growing worries about output in Zambia, which is facing an El Nino-induced power crisis. 

Prices spiked on huge volumes on Wednesday after smelters in China held a crisis meeting on how to cope with a sharp drop in processing fees following disruptions to supplies of mined ore. The group stopped short of coordinated production cuts, but pledged to re-arrange maintenance work, reduce runs and delay the startup of new projects.

In the coming weeks, investors will be watching Shanghai exchange inventories closely to gauge both the strength of demand and the extent of any capacity curtailments.

“The increase in SHFE stockpiles has been bigger than we’d anticipated, but we expect to see them coming down over the next few weeks,” Colin Hamilton, managing director for commodities research at BMO Capital Markets, said. “If the pace of the inventory builds doesn’t start to slow, investors will start to question whether smelters are actually cutting and whether the impact of weak construction activity is starting to weigh more heavily on the market.”

Copper jumped as much as 2 per cent to US$9,066.50 a tonne on the London Metal Exchange on Friday. Other metals were mixed, with aluminium gaining 0.6 per cent and lead dropping 1.8 per cent.

Iron ore futures in Singapore held below the key US$100 level, trading at US$98 a tonne. BLOOMBERG