Chinese manufacturing rebounds, but copper demand remains modest

This week, the price of copper has again confirmed its fair stability amid uncertainty. After last week's recovery, we can see a renewed decline in recent days, amounting to -2.1% at the London Metal Exchange (LME) and -1.2% at the Shanghai Futures Exchange (SHFE), compared to the closing values of Friday, March 3. Thus, from a long-term perspective, no clear change of course emerges from what has been observed over the past month.

Copper numbers in China

Last week China's manufacturing PMI indices provided clear signs of recovery. Nevertheless, in line with price dynamics, China's recovery in copper demand still seems tepid.

More data point toward this direction. Let us look, for example, at copper inventories at the SHFE, which have shown a clear increase at the beginning of 2023; in contrast, at the LME stocks have reached historic low points.

The latest Chinese import data, released this week by the country's General Administration of Customs, also point in this direction. In January-February 2023, China, the world's largest importer of copper, posted a 5.3% year-on-year contraction in imports of copper ore and concentrates, measured in US dollars; meanwhile, imports of crude copper and copper products were down by 20.6%.
Broadening the outlook to the total amount of goods, customs data report a 10.2% contraction for Chinese imports in the first two months of the year, compared to the same period of 2022, while exports dropped by 6.8%.

Thus, the first two months of 2023 seem to close with copper demand remaining modest, most likely still met by existing stocks, even as industrial activity picks up. Nevertheless, financial markets' hopes remain geared toward an increase in demand in the months ahead, as the country's economy officially restarts. The high levels touched by PMI indices for February thus safeguard the prospects for a bright recovery, including for metals' demand.

Further news circulated this week, regarding the health of the Chinese economy, is the outcome of last weekend's parliamentary meeting ("Two sessions"), which set the growth target for 2023 at around 5%: this target was considered by markets to be more modest than expected.

Financial news: FED and ECB

This week markets' mood, and indirectly the price of copper, was also influenced by news on the monetary policy front. After a generally hawkish mood in February, due to a "stickier than expected" US inflation, on Tuesday this stance was confirmed by a speech by J. Powell. In a speech to Congress, the Federal Reserve chairman stated that the institution will most likely raise rates more than previously expected, in order to keep inflation in check.
These statements supported the dollar exchange rate on Wednesday, consequently impacting USD-denominated commodities.

Let us now look at our side of the Atlantic. With an almost certain 50 basis point increase in benchmark rates at the next ECB meeting in March, the Governing Council does not appear unanimous on the magnitude and speed of rate hikes in the months ahead. There are many knots to unravel, ranging from the timing of rate hikes to the issue of a still high core inflation. What effect can falling energy prices exert on core inflation, and in what timing?

Data suggest that energy prices are certainly below the levels touched in 2022; on the other hand, there is also some stability in the early months of 2023, above pre-health crisis levels.

It will therefore be next week's meeting to provide, even for the Eurozone, an update on the expected course of the next monetary policy moves.