--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, March 6 This year's
commodity rally has ended and magically restarted in just five
days, and it's all because of China.
Commodity prices dropped on March 1, with London copper
hitting a three-month low of $7,659.50 a tonne, on
concern that industrial production in China, the world's biggest
buyer of the industrial metal, was losing momentum.
This was because both the official and HSBC Purchasing
Managers' Indexes fell to five-month and four-month lows
The gloomy feeling was amplified by Chinese authorities
saying they will take steps to cool property prices, which was
interpreted by the market as bearish for construction and, by
implication, both copper and iron ore demand.
However, by March 5, all was good again after China's
outgoing Premier Wen Jiabao announced record government spending
in order to boost consumer-led growth.
Even though China kept its 2013 economic growth target at
7.5 percent, the same as last year's, the market interpreted
Wen's comments as positive for commodity demand, and London
copper rallied. It was trading at $7,766.75 a tonne in early
Asian trade on Wednesday, up 1.4 percent from the March 1 low.
It was the same story with crude oil, with front-month Brent
futures dropping to the lowest this year on March 4,
weighed down by China and concern over government spending cuts
in the United States.
But once again, prices rallied on the positive news and
Brent was at $111.61 a barrel on Wednesday, up 1.9 percent from
the March 4 low of $109,58.
Of course, nothing fundamental about the Chinese economy has
changed in the past week and the story of a modest recovery from
last year's slowing in growth remains intact.
It's also not unusual for markets to trade on the 24-hour
news cycle and certainly some investors rely on the day-to-day
volatility to make money.
But commodity prices would benefit from less of the instant
analysis that follows every twist and turn and relatively minor
indicator out of China.
RECOVERY ON TRACK
Economic data and political announcements should be sifted
for their importance and analysed in terms of how they can
potentially change the prevailing consensus.
Certainly the two PMIs confirmed that the recovery remains
on track, but unlike the boom after the 2008 global financial
crisis, it will be more measured.
The curbs on property have more potential to impact on
commodity markets, especially if they do result in a slackening
But this is far from a definite, meaning that right now the
outlook for steel and iron ore demand isn't as assured as it was
earlier this year.
In fact, the real estate measures are just another reason to
be cautious on iron ore, given the steel-making ingredient's
massive rally from a three-year low hit last September.
Spot iron ore .IO62-CNI=SI rallied 83 percent between its
low and the recent high of $158.90 a tonne reached on Feb. 20.
It has since declined 8.6 percent to $145.20 and probably
has further to fall, given the softer demand growth possible in
China and expected supply additions in top producer Australia
from the third-quarter onwards.
But overall the outlook for commodity demand in China is one
of steady growth, especially against the backdrop of increasing
consumer spending and the ongoing urbanisation, which should see
at least another 130 million people move permanently to urban
areas over the next decade.
What investors outside China have still to come to terms
with is that the rates of growth in commodity demand are going
to slow, but instead of this being a "bad" thing, it's a
necessary function of a maturing economy.
The key thing to remember is that there is still likely to
be growth in demand over the medium- and long-term and any
volatility is likely short term in nature.
The next risk event comes with the February trade data due
March 8, with the possibility of some softer numbers on
However, the numbers will have to be read together with
January's in order to get an accurate picture, given that the
week-long Lunar New Year was in February this year but in
January last year.
The February numbers would have to be exceptionally weak in
order to upset the view of steady growth in Chinese commodity
demand this year.
(Editing by Miral Fahmy)