--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, March 6 (Reuters) - 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 respectively.
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.
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 of construction.
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 commodity imports.
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