Metals markets breathe a sigh of relief as China eases Covid restrictions

Above AG metal mining

It may be winter, but it feels like spring for many in the metals industry and for metal prices in general. After years, China plans to ease its COVID-19 restrictions a bit. These include a reduction in the mandatory quarantine period, which has caused myriad problems for the country’s economy. As one of the world’s largest producers and consumers of metals and minerals, the country’s decision feels like a hope for many weary buyers and sellers.

Indeed, the decision gave the long-desperate metal world a major boost. Prices for several base metals rose significantly on Friday following the announcement. Of course, this was not only due to the easing of some restrictions, but also to renewed expectations that China would soon completely abandon its zero-COVID policy.

The news sent metal prices higher

The general market reaction was immediate. Three-month copper on the London Metal Exchange (LME) rose 3.4%, its highest level since June 22, 2022. Meanwhile, the top-traded December copper contract on the Shanghai Futures Exchange rose 1.5% to US$9515.30 -dollars (67,630 yuan) a ton. This represented the highest level in about five months.

Iron ore also rose last Friday. In fact, January’s top-traded iron ore on China’s Dalian Commodity Exchange, DCIOcv1, ended day trading 5% higher at $99.86 (708.50 yuan) a ton. Price benchmarks for steel products and other steelmaking inputs also boosted gains. This is to be expected as China remains the world’s largest steel producer,

So far the good vibes continue to carry over to this week. London copper prices edged up Monday and are currently hovering near their highest level in five months. Iron ore futures from Singapore also rose by 5% to $95.85/t.

With the exception of aluminum, almost all base metals markets appear to be supporting China’s easing of COVID restrictions. In fact, China’s pandemic restrictions were only part of the problem, as Russia’s invasion of Ukraine only exacerbated global trade woes.

China still has a lot to do

There are many theories as to why China initiated this long-overdue turnaround. Some suspect China’s decision to minimize the impact of COVID restrictions had to do with the LME’s failure to ban Russian metal. With the metals markets on the verge of a dangerous turn, something had to be done.

Undoubtedly, China’s zero-Covid lockdowns have drastically impacted its manufacturing sector and demand for industrial metals. But that’s only half the story. The other half is the fall in demand in China’s real estate sector. This means that this brief bull run in metal prices can only be sustainable in the medium term if the consumer market picks up.

Up to this point, China’s property market continued its October slump. Imports of raw copper and copper products fell by 1.5% compared to the previous year. For residential steel, the drop in demand was almost 30%.

China issues bailout package for ailing real estate sector

Fortunately, the Chinese government recently released a 16-point bailout package for the country’s housing sector. While that’s great, it may not be enough to pull the markets out of the doldrums. In addition, the easing of COVID-19 also seems to be a little difficult for the time being, especially given that the country continues to report a high number of cases almost every day.

Finally, it’s important to remember that consumer demand is one of the many things driving investor sentiment. For a market that has been in a downward spiral for the past 13 months, maintaining the current positive sentiment can be challenging.

Yes, easing COVID restrictions is a step in the right direction. But the question Chinese authorities have yet to answer is the only question the world has: What’s next?

By Suhrab Darabshaw

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