Iron ore and copper prices have retreated sharply, signaling that the Chinese economy is not recovering as fast as expected. Copper dropped to a low of $3.70, the lowest level since January this year. It has dropped by more than 15% from the highest point this year. Similarly, iron ore prices have dropped to $102.7, the lowest point in five months.
Weak China demand
The main consensus among investors earlier this year was that China’s economy would stage a strong reovery this year after ending the Covid-zero policies. There was also another consensus that the European economy would sink into a recession because of higher energy prices.
These consensus views were wrong. In Europe, countries like France, Germany, and the UK are doing well, helped by low energy prices. On the other hand, China’s economic recovery is at a slower pace than expected.
A good barometer of this trend is the performance of copper and iron ore prices, which are consumed heavily in the country. Historically, the prices of two metals tend to do well when China’s economy is recovering.
Recent data shows that many steel producers in China boosted production in the first quarter of the year. They produced over 262 million tons of steel but buyers have been limited. In a note, an analyst told the Financial Times:
“The demand for steel has collapsed since the start of April,” said one Hong Kong-based trader. “The market was expecting a 10 per cent increase in steel demand for infrastructure [this year], but our most optimistic estimate is 2 per cent.”
Recent manufacturing PMI numbers from China and other industrial economies shows that the situation is not doing well. Figures in China showed that the manufacturing PMI figure came in at 49.5 in April. A figure of below 50 is usually a sign that a sector is contracting. The global manufacturing PMI dropped to 49.6 in April.
Copper and iron ore prices implications
The sharp decline in copper and iron ore prices is a positive thing for the world economy that is dealing with elevated inflation. This is coupled with the fact that oil and gas prices have also retreated in the past few months.
Inflation in most countries is dropping. On Thursday, data from China showed that inflation slowed to 0.1% in April, the lowest level in two years. In the US, the headline CPI dropped to 4.9%.
Therefore, while the iron ore and copper prices crash point to a slowing Chinese economy, there is a possibility that the trends will be beneficial to most countries. These prices will likely continue retreating considering that the commodity supercycle is fading.
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