Copper markets sanguine as Chinese manufacturing slumps to 8 month low

More evidence of slowing demand from China emerged this morning with manufacturing activity dropping to an 8 month low. The HSBC/ Markit flash purchasing managers index (PMI) fell to 48.1 in Mar, down from 48.5 in Feb and against expectations of a bounce in activity to 48.7. Copper futures initially fell on the news before recovery to around $6,490 per tonne on hopes that the recent flurry of bad data from China would spur the authorities into action and introduce further stimulus measures.

However, Bloomberg reports comments from Finance Minister Lou Jiwei suggesting China will focus on quality of growth this year, which means no shotgun stimulus program. Lou added that China will pay more attention to the environment and won’t use  large-scale fiscal stimulus to spur investment in order to reduce overcapacity. Although the Chinese authorities have set a 7.5% growth target for 2014, China’s premier has alluded to a level of flexibility – research from China’s National Development and Reform Commission sees growth at 7% in 2014.

Related article: Chinese demand key to commodity prices in 2014

Nevertheless, concerns about copper demand from China may be overstated according to research from Barclay’s. Demand for copper from the power sector (more than 40% of China’s copper consumption) is expected to rise in 2014, potentially offsetting lower growth in property and infrastructure. According to Barclay’s China’s grid companies invested 40 billion yuan (about $6.4 billion) in the first two months of the year, up 22% year-over-year with China’s main two providers both expecting to invest 13% more than last year.

Related article: Copper price at four year low may be buying opportunity

Chart: Chinese manufacturing activity

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Source: ZeroHedge

Weather and China key drivers of commodity prices in 2014

Commodity price gains have generally been led by crops with weather concerns supporting prices. Drought in Brazil raising concerns that this and next years harvest will be damaged. The most surprising bar on this chart is natural gas since the so called ‘polar vortex’ over the US resulted in a surge in demand for heating while the extreme cold prevented rigs from responding. Natural gas prices peaked in mid-February at over $6 per mBtu (at the time up over 50% during 2014) but since then warmer weather has caused prices to fall, giving up virtually all its gains since the start of the year. The weakest commodity prices have been industrial metals where signs of a slow down in China coupled with concerns about commodity financing deals has reduced demand for the metals. The exception has been nickel where the introduction of an ore export ban by key supplier Indonesia means Chinese buyers are now running down their stocks and searching for alternative suppliers.

Chart: % change in commodity prices during 2014

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Source: ABN Amro

Related article: Chinese demand key to commodity prices in 2014