The contrasting fortunes of the prices of industrial metals inside and outside of China serves to illustrate two trends as the Asian region starts to emerge from coronavirus lockdowns.
The first is that the recovery is uneven and likely to remain so, and the second is that the more exposed to China the commodity is, the greater the likelihood it outperforms those metals that are not.
The spot price for benchmark 62% iron ore delivered to China, as assessed by commodity price reporting agency Argus, ended at $99.95 a tonne on Monday, just down from $100.75 on May 29, the highest since August last year.
Iron ore is up 10.5% since the end of last year, making it a stand-out commodity amid the wreckage of the novel coronavirus, which has smashed demand for energy and other commodities as much of the world economy was placed in some form of lockdown as the pandemic spread.
Iron ore’s story is bullish for several reasons, but chiefly because China, where the novel coronavirus was first reported, emerged from the virus first and market watchers have bought into the optimistic view of a V-shaped recovery, bolstered by government stimulus spending.
This is still largely a fear rather than reality, but the risk of lower supplies in months ahead is adding a certain frothiness to iron ore.
If the spot price of iron ore is performing well, then the domestic China price, as traded on the Dalian Commodity Exchange is going gangbusters.
The contract is up 34.9% this year in local currency terms and has surged 48% since the low so far in 2020, hit in early February as China was starting to lock down its economy to contain the spread of the coronavirus.
It is a similar story in copper, with the Chinese domestic price outperforming the international benchmark.
Copper contracts in Shanghai rose to a three-month high of 44,900 yuan ($6,306) on Tuesday. They are down 8.6% since the end of last year, but up 27.7% from the trough this year on March 23.
London three-month copper contracts are down 11% from the end of last year, and the rally since the low on March 19 has been 25.6%, which is a solid performance but behind the Chinese domestic price.
Copper is a commodity that still has strong exposure to China, which accounts for about half of global demand.
But it is also a commodity used extensively in Asia’s other leading economies, such as Japan and South Korea, where recent economic data has been less encouraging.
China’s official Purchasing Managers’ Index (PMI) and the Caixin/Markit index both stayed in positive territory in May, at 50.6 and 50.7 respectively. In contrast, Japan’s PMI shrank at the fastest pace since 2009 to 38.4 in May from 41.9 in April, while South Korea’s fell to 41.3 from 41.6.
In aluminum China counts for about 56% of global output, and its domestic price is down 7.4% from the end of last year, but up 14% from the low in 2020 on April 2.
London aluminum is down 15.1% from the end of last year, and the rally from the low on May 15 is 5.1%.
There is a slight element of currency depreciation in play, with international prices quoted in U.S. dollars and Chinese prices in yuan, which has slipped from 6.96 to the dollar at the end of last year to 7.12 at the close on Monday.
But overall the trend seems clear: The metals with the biggest China element to their story are performing better.