IKN

Here’s another reason to be bullish copper (if you needed it). The intro note from IKN724, out last night.

No China Crisis

Yes, yes, I could be wrong
Why, why, should I pretend
Cos God only knows in the end

China Crisis, “Black Man Ray”,1985

Today’s intro is not about The USA and gold, instead we lift one of the themes of today’s Copper Basket and do China and copper. One of the more enduring tropes of the Chinese economy is of its impending collapse and this desk has been hearing about the problems faced by the world’s largest command economy for many years. As one example of many, we’re regularly invited to watch social media exclusives as some-or-other building crew demolishes some-or-other block of high-rise living quarters that have failed to attract a single resident. That it never occurs to the prophets of doom publishing these clips just why these images are allowed to escape the Great Firewall is rarely considered, not when there’s some bias to confirm.

But not here. This desk has been clear-eyed about the effects of Chinese demand on commodities and raw materials of all types, from the time it “only” made up around 25% of world demand for copper. These days it’s 55% of all copper produced around the world and from the look of the latest data, that demand isn’t about to come to a stop. A month ago we reported on the 52.6 reading from the China Manufacturing Purchasing Managers Index, normally known as “China PMI” and one of the better gauges of true economic activity in the country. That came as quite a shock to observers expecting a reading of just over 50 (the median indicating expansion) as it was the highest PMI in over a decade. Analysts scrambled to explain why they’d got it so wrong and once a large dose of 20/20 hindsight had been applied, they decided that the combo of the end of Covid Zero regulations and the Chinese CCP government’s economic stimulus package that had been approved just before President Xi did his abrupt 180° on Covid restrictions (after protests threatened to upset the country) were behind the sharp improvement. Here’s how we put it in IKN720 dated March 5^th when commenting on the blowout number:

We’re now seeing the result of this double upside whammy to the Chinese economy; the downturn, obvious in the Q4 PMI readings above, is now all over. So the February number was strong and enough on its own to boost copper (and other things), but what you should really be thinking about is what happens when the next reading comes out strong. It wouldn’t need a record number, all we want is a good expansive number and the market is going to read a different story into China’s economic data. The combo of stimulus and re-opening promises to be explosive for its economy, far more so than any of those anecdotal videos of authorities demolishing empty blocks of flats in provincial cities may be.

That was then, this is now and on Friday we got the March 2023 PMI reading, which had been forecast at a mildly expansive 50.5 before February’s blowout number. That shifted the forecast up to 51.5 but (2) instead, we got…

…51.9, another strong reading. This chart is a snapshot of the post-Covid years for reference (Feb 2020 was 37.4) and includes the weirdness that created, but for better context the link above will show that 51.9 is in the top five readings since 2012. So even without February’s blow out, China’s March 2023 would impress the suited and booted anal ysts of the world.

There’s nothing wrong with the economy of China and its economic stats show that clearly. As does its appetite for copper and for more on the way the world’s inventory drawdown is now making headlines since Robert Friedland put it front’n’centre of his PDAC keynote (good for him) see The Copper Basket below. But here in today’s intro we take a slightly different and more conspiratorial route. Here’s a simple question:

Considering that copper is the only major metal China needs to import in large quantities from the rest of the world due to a lack of copper mines and deposits on its home soil, if you were China would you prefer copper to be expensive, or cheap?

Don’t think about it too hard, it’s not a trick question. So if you agree with this desk and answer “cheap”, might that be a reason for those “China about to implode” headlines and news stories so regularly leaked to the western world? And now for a simple observation to add to that simple question, as for several years the copper space would, from time to time, be rattled by sudden and large inventory events, mostly to the LME and mostly at its Asian warehouses. From out of nowhere, warehouses would be bombed with a large influx of copper inventory that would send jitters through the market, add to any bearish case and, more often than not, stop price appreciation in their collective tracks. Examples of these Inventory Bombs for LME copper include:

• March 2017, when LME copper inventories jumped 95,000 metric tonnes (mt) in one month
• January 2018, when LME copper inventories jumped 97,000mt in the month
• April 2019, when LME copper inventories jumped 60,000mt in the month
• July 2019, when LME copper inventories jumped 45,000mt in the month
• August 2020, when LME copper inventories jumped 72,000mt in the month
• March 2021, when LME copper inventories jumped 67,000mt in the month
• June 2021, when LME copper inventories jumped 89,000mt in the month
• April 2022, when LME copper inventories jumped 62,000mt in the month

Arguably that last one may have been more about the fall-out from Russia’s invasion of Ukraine, but this publication has documented the way in which large lumps of copper inventory have come out of nowhere in an attempt to disrupt the copper market too many times for that list (and more where they came from) to be coincidence. Therefore, it’s interesting to note that we haven’t seen any of these large dumps in the last year, that at a time when the Chinese strategic reserve for copper (and other commodities) is reputed to be at all-time lows and the shadow stocks of copper in non-bonded warehouses are reportedly down to fumes as well. Suddenly, China has no more bullets left to shoot at a copper market that is showing every sign of breaking upward in the near term and has shown itself to be remarkably resilient to the normal tide of US recession talk.

The metal’s nickname isn’t “Dr. Copper” for any medical reason. The “PhD in economics” metal has an uncanny track record as lead indicator for the financial world. Copper bears are puzzled by how it has stayed above U$4.00/lb (a price that provides rich profits for the large copper miners of the world) in the face of US hard landing and recession risks, they have been reluctant to give up their bearish position and admit that this time might be (slightly) different. We, on the other hand, have fewer doubts and whatever might happen to the US economy in the quarters to come, Chinese demand for copper will remain robust as we then move into the much-predicting structural deficit for the red metal, as forecast by all and sundry for 2024 and beyond. The secret ingredient now keeping copper prices high may turn out to be the lack of “bear bullets” left in the Chinese arsenal and however much they’d like to spook the market and push prices lower, they no longer have the wherewithal to do so.