Commodity markets bet Beijing’s bid to boost its economy will work

Launceston, Australia — Commodity markets appear to have delivered their verdict on China's plans to stimulate its economy, betting that Beijing's boost to infrastructure spending will work.

China's central bank cut the amount of cash that banks have to hold as reserves for a fifth time in a year on January 4, a move that will free up as much as $116bn in new credit.

The looser monetary policy announcement came two days after the national rail operator said it planned 6,800km of new track in 2019, a 40% lift on what was laid in 2018.

This implies a substantial hike on the 802.9-billion yuan ($117.2bn) invested in rail in 2018, cash that will flow through to increased demand for steel, copper and also for coal used to provide energy to process ores into refined metals.

Certainly, the prices of these commodities have improved in recent days, taking heart from Beijing's stimulus, and also from some renewed optimism that progress is being made to resolve the US-China trade dispute.

Shanghai copper futures rose 1.2% from the 18-month closing low of 46,830 yuan a tonne on January 4 to end at 47,380 yuan on Monday, and they extended gains in early Asian trade on Tuesday.

London copper futures also rebounded from a similar 18-month low of $5,736 a tonne on January 3, closing up 3.3% at $5,923 a tonne on Monday.

Iron ore for delivery to China, as assessed by Argus Media, has been rising since late November, and Monday's close of $74.80 a tonne was up 2.6% since January 3, and almost 16% since the four-month low of $64.55 on November 27.

The exception so far is thermal coal, with Argus Media's assessment of cargoes at Australia's Newcastle Port dropping to $98.40 a tonne in the week to January 4 from $99.74 the prior week.

However, Newcastle coal is still almost 1% higher than the six-month low of $97.50 a tonne reached on November 23.

Thermal coal is also likely to have struggled in recent weeks given Beijing was discouraging imports in December as part of efforts to limit total 2018 imports to a level similar to those in 2017.

While this failed, it did cause seaborne imports of coal to drop to 15-million tonnes in December, the lowest monthly total since February 2016, according to vessel-tracking data compiled by Refinitiv.

Iron ore holds up

In contrast, iron ore import volumes have held up, lending some fundamental support to recent gains in prices.

China's seaborne iron ore imports were 86.4-million tonnes in December, according to Refinitiv, up from 82.8-million in November.

Imports on unwrought copper were 456,000 tonnes in November, the latest month for which official data is available, up from 420,000 the prior month, and above the average of 442,600 for the first 11 months of the year.

For the recent price gains to extend into a sustained rally, it's likely that physical import volumes will have to hold up, or grow somewhat in coming months. That means that the stimulus measures must translate to actual activity sooner rather than later, or the optimism they have created may ebb away.

Of course, there are other factors that will drive short-term sentiment and commodity prices, chiefly the success or otherwise of the latest round of talks between the administration of US President Donald Trump and his Chinese counterpart Xi Jinping.

Recent positive comments from US commerce secretary Wilbur Ross notwithstanding, there is still considerable uncertainty over whether an agreement can be reached.

If a deal is struck that goes some way to normalising trade between the world's two biggest economies, then commodities should enjoy a relief rally that will add to the positive vibes created by Beijing's stimulus.

The risk is that the opposite also applies, a no deal, or worse, an escalation in the dispute, would likely snuff out any rally in commodities such as iron ore, coal and copper.

Reuters