--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Jan 4 Copper and iron
ore, the industrial metals most likely to benefit from China's
renewed growth, have enjoyed strong starts to the new year but
they run the risk of rallying too hard, too quickly.
No doubt investors have been cheered by the avoidance, for
now anyway, of the fiscal cliff in the United States and growing
signs that China's economy is re-accelerating after achieving a
soft landing last year.
Asian spot iron ore .IO62-CNI=SI gained 3.4 percent in the
first two trading days of 2013, taking it to $149.80 a tonne, a
rally of 73 percent since the low of $86.70 in September last
London copper rose 2.7 percent the past two days to
$8,149 a tonne, taking its gains since its low last June to 12.3
Shanghai copper didn't trade for the first three
days in January due to Chinese holidays, but by 9 a.m. local
time Friday it had gained 1.2 percent to 58,390 yuan ($9,268) a
tonne, up 14 percent from the low last year, also recorded in
What copper and iron ore have in common is that they all
declined as the market feared a hard landing in China, and all
started to recover when it became clearer that these concerns
were overblown and that the elusive soft landing was more
But the recovery in China's key manufacturing sector is
still modest, and certainly nowhere the scale of the rally seen
after the global financial crisis and recession of 2008-09.
The official Purchasing Managers' Index held steady at 50.6
in December, it's third consecutive month above the 50 mark that
separates expansion from contraction.
The official survey was slightly more muted than the HSBC
PMI, which rose to 51.5 in December, its highest reading in 11
However, the official survey captures more of the large,
state-controlled industries that are key to metals demand, while
HSBC focuses more on smaller enterprises.
The official PMI recorded a 2012 low of 49.2 in August,
meaning it has gained 2.8 percent since then.
This is a small rally compared to between November 2008 and
December 2009, when the PMI gained from 38.8 to 56.6, a jump of
46 percent, and even well short of the 8.8 percent gain recorded
between November 2011 and April last year.
The huge jump in the PMI in 2008-09 was matched by similar
gains in metal prices, with iron ore surging 216 percent between
late March 2009 and April 2010 and Shanghai copper, expressed in
U.S. dollars, gaining 177 percent between December 2008 and
This means that roughly iron ore's rally in percentage terms
was 4.7 times that for the PMI and copper's was 3.8 times.
In contrast, iron ore's rally from last year's low is 26
times that for the PMI, while Shanghai copper's is more subdued
at 5.5 times, and London copper is 4.4 times.
These calculations suggest that while copper hasn't rallied
excessively relative to the improvement in the Chinese PMI, iron
ore is well overbought.
However, it's worth bearing in mind that iron ore had a much
larger fall in the middle of 2012 than copper.
The steel-making ingredient plummeted 42 percent between
April 10 and Sept. 5 last year, while Shanghai copper, in dollar
terms, retreated 14 percent between February and June.
The Chinese PMI dropped 7.7 percent between April and August
last year, meaning iron ore's decline was 5.5 times bigger than
that for the PMI, while copper's was only 1.8 times.
However, even copper has rallied harder, relative to the
gain in the Chinese PMI, than it did in the 2008-09 rebound.
It's also worth noting that in previous bullish periods,
both metals peaked about three months after the PMI, so it also
appears that so far in this rally, iron ore and copper are
front-loading their gains.
While the rally may well run for some time, especially if
the Chinese PMI continues to improve, it may be the case that
the pace of gains in copper and iron ore eases.
(Editing by Miral Fahmy)