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Outlook 2023: Iron ore and copper prices could benefit from China recovery


MongiIG

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China stimulus and relaxation of covid restrictions are likely to benefit copper and iron ore prices and in turn diversified miners

BG_copper_9002798.jpgSource: Bloomberg
 

 Shaun Murison | Senior Market Analyst, Johannesburg | Publication date: Tuesday 13 December 2022

China covid restrictions relax for now

Widespread protests in China appear to have forced the hand of Chinese officials who have begun easing lockdown restrictions within the world’s second largest economy.

A week after the highest infection number the country has seen since the start of the pandemic, a softening of restrictions now sees:

  • Interprovincial travel allowed
  • Lockdowns narrowed to buildings or floors rather than whole neighborhoods
  • Rapid tests replacing PCR tests
  • Central quarantining facilities no longer compulsory for those with covid
  • International arrivals allowed
  • Schools remaining open (in the absence of material outbreaks)
  • Public transport, gyms and restaurants no longer requiring PCR tests for entry

The relaxation of zero-tolerance pandemic rules suggests a move closer to fully reopening the world’s second largest economy. China’s closing of factories and ports in 2022 has disrupted economic growth, employment and further impacted global supply chains. Lockdowns have impacted the manufacturing, financial, property and technology sectors within the region to name but a few.

China’s property sector finding some government support

China’s property sector has in recent times accounted for up to nearly 30% of the region’s economic growth. A debt crisis in the country’s largest property development company Evergrande has provided a shock to the system with fears of contagion spilling over into the financial sector as well.

We have now seen Chinese authorities stepping in to support the sector (homebuyers and developers alike) with a 16-point plan aimed at softer lending requirements through lower rates and extended payment schemes. There is a strong suggestion that policymakers will soon move to further support the industry and in turn the Chinese economy.

Iron ore could be a beneficiary, although risks remain

Government leniency on covid policy and support for the housing / property market does start to suggest improving demand side assumptions.

China imports roughly 70% of all seaborne iron ore. Iron ore is a key commodity used in the fabrication of steel. The property sector accounts for around 40% of Chinese steel consumption. Should authorities manage to provide some buoyancy to the sector it should provide support to iron ore prices.

The recent rebound in iron ore pricing does start to suggest this optimism, although risks do remain should hard lockdowns reemerge, and emission controls stifle the production capacities of steel.

131222Ironore.pngSource: IG

While overbought in the near term, the price of iron ore (Dalian) has recently broken out of a range and trades above the 20 (red), 50 (green) and 200 (blue) day simple moving averages (MA’s). The lay of these moving averages suggests the short to medium term trends for the commodity as up, while the longer-term downtrend has been broken.

The technical indications suggest that we could have a short-term pullback in price before the uptrend is continued. A pullback towards the 760 level is considered healthy for longer term gains with 925 the next upside target from the move, although if this pullback instead sees the prices back below the 690 level, our bullish assumptions would need to be reassessed.

Copper could move into a supply deficit

China is also the world’s chief importer of copper and support for the property sector as well as the curbing of covid restrictions will increase demand for the commodity as well. China restocking diminished inventory levels of the industrial metal combined with coppers increased appeal through greener renewable energies could bode well for prices in 2023.

Copper supply is said be very low in the global marketplace with suggestions from the likes of Goldman Sachs, Bank of America and Trafigura that the metal should trade in deficit territory though 2023, possibly reaching new high territory in the year.

 

131222Copper.pngSource: IG

The short to medium term trends for copper are considered up with the 20MA trading firmly above the 50MA. The price is currently testing the 200MA.

For confirmation that the short to medium term uptrend in copper is continuing, we would like to see the commodity price trading above the 200MA and 8595 resistance levels. In this scenario 9030 becomes the initial upside target from the move, a break of which (confirmed with a close) would suggest 9770 as a further target from the move. Should the copper price instead retrace to move below the 7900 level, our bullish assumptions on the commodity would need to be reassessed.

Major miners of copper and iron ore

Our assessment in terms of fundamentals is slightly more bullish for copper than for iron ore, primarily due to supply side assumptions and renewable energy verse high emission production view on these commodities. However, we do think that Chinese demand could lend support in the medium term for both base metals in 2023.

Major miners of both commodities include: the BHP Group, Rio Tinto, Glencore and Anglo-American Plc. Major listed companies with a more direct focus on iron ore production include Vale, Fortesque and Kumba Iron Ore. Of the mining companies mentioned, Glencore has perhaps the more proportional exposure to copper in terms of earnings.

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