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What Could Derail The Copper Rally?

What Could Derail The Copper Rally?

An increasingly electrified world means…

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Copper Prices Plummet To Lowest Levels Since 2020

  • A sharp spike in Covid cases in China is jeopardizing its economic recovery.
  • Copper prices have plummeted to levels not seen since 2020.
  • As China weighs its next steps to manage COVID, it continues to look toward infrastructure to reach growth targets which could create volatility in markets moving forward. 
Copper Price

Copper price action continues to show massive bear trends and signals further declines.  The continuous breakdown of short-term trading ranges fosters a volatile market. This leaves industrial buyers at risk of inventory value fluctuations.

Spike in COVID Cases Puts China’s Recovery in Limbo and Affects Copper Prices

The highly infectious BA.5.2 sub-variant of the coronavirus arrived in China as Beijing issued its first vaccine mandate. Meanwhile, Shanghai’s covid cases rose to their highest level since late May. The city continues to struggle with the omicron variant. Since Shanghai emerged from lockdown, China shifted toward targeted quarantines. The latest jump in cases will once again test China’s resolve for zero-COVID. Up to this point, China has resisted another full-scale lockdown. The apparent hesitation suggests a subtle shift in China’s strategy. However, another lockdown could remain on the horizon should infection counts surpass a certain threshold. The last lockdown caused extensive damage to China’s economy. The Caixin Manufacturing Index PMI contracted to a 26-month low in April. Furthermore, a recent Bloomberg report suggests that China’s GDP likely contracted in Q2. This is contrary to any number the CCP will release.

Related: The EU Is Prepping Another Round Of Sanctions Against Russia

While copper prices peaked in March, muted demand from China triggered the beginning of the price downtrend. The impact of China’s lockdowns started taking effect during the second half of April. The price descent continued following a brief rebound. However, it failed to overtake its previous high as Shanghai emerged from lockdowns. However, bearish focus shifted growing fears of an economic recession in the West. China’s recovery has, thus far, failed to reverse the downward momentum. However, any backtracking could accelerate the current free fall in prices that now sit nearly 30% beneath their March 7 peak.

Infrastructure or Bust?

As China weighs its next steps to manage COVID, it continues to look toward infrastructure to reach growth targets. According to a recent Reuters report, China will create a state infrastructure investment fund totaling nearly $75 billion in Q3.  Its latest moves follow President Xi’s late-April commitment for an “all-out” strengthening of infrastructure construction. While projects will likely be expansive, Xi emphasized “sci-tech” infrastructure. China looks toward building its digital economy as well. To fund its ambitions, China’s cabinet announced it would raise the credit quota for policy banks by $120 billion. It will also issue nearly $45 billion in financial bonds. 

Upcoming plans follow already sizable investments during the first half. According to data from the National Bureau of Statistics, infrastructure investment during the first five months of the year increased by 6.7% from 2021. Total planned investment in newly started projects rose by 23.3% during that same period.

Will China’s Infrastructure Push Halt Copper Price Fluctuations?

While China’s stimulus measures extend beyond infrastructure, infrastructure spending appears as the priority. It’s also not the first time China used this strategy. Back in 2008 amid the Great Recession, China’s State Council announced a $586 billion (CNY 4 trillion) stimulus package in November of 2008. While the package expanded the debt, it also spurred growth following a sharp dip. Copper prices likewise took note as the downtrend hit a bottom by December.

China’s efforts may not have the same effect in 2022, however. Projects announced thus far will certainly benefit copper, but it remains unclear how total spending will compare to 2008. Further, China’s debt sits much higher than it did in 2008. This, on top of its property sector and the damage already done by the zero-COVID approach, leaves China in a much weaker position. China’s current covid restrictions also pose a risk. Even if they fall short of city-wide lockdowns, they come at the expense of a larger recovery and remain disruptive to any business or project. Whether China can manage its vulnerabilities and both fund and execute enough projects to compensate for the weight of the global economic downturn appears, at this point, unlikely.

By AG Metal Miner


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