Materials

Commodity Spotlight: China's $1tn infrastructure boost buoys outlook for iron ore, copper and more

Fri 26 Aug 22, 2:41pm (AEST)
Copper 16 Mining Truck
Source: iStock

Key Points

  • Copper is pushing a two-and-a-half month high
  • Iron ore struggles to hold onto gains amid falling Chinese steel margins and energy shortages
  • Uranium spot prices fails to rally despite a massive turnaround for Japan's view on nuclear power

The Bloomberg Commodity Index has recouped roughly half its June losses and so far up 1.5% this week.

Bloomberg commodity index futures
Source: TradingView

Copper: Possible catalyst

There's so many Chinese stimulus headlines every week I get confused as to whether or not its a new one or a package that's a part of an old one.

On Wednesday, China increased its support for its covid-ridden economy with a further 1tn yuan (US$146bn) of stimulus mostly for infrastructure, according to Bloomberg.

The infrastructure spending is expected to be directed into renewable and power grid-related initiatives to help ease an ongoing energy crisis.

China's record breaking summer heat wave and drought has taken a massive toll on regions such as Sichuan, which is particularly dependent on hydropower.

"China’s energy shortages highlight the need for increased investment in its power grid. And that could lead to a pick-up in demand for both copper and aluminium," said ANZ analysts including Daniel Hynes in a note on Thursday.

"We have therefore raised our estimates of demand for copper and aluminium in China, despite the property sector headwinds that are weighing on their use in construction."

Copper futures chart
Copper futures (Source: TradingView)

Iron Ore: Subdued steel margins

The stimulus headlines helped boost iron ore prices, with Singapore futures rallying around 5% to a high of US$109.5 on Wednesday.

The rally faded as the demand recovery in Chinese steel markets waned, with utilisation of electric arc furnaces (EAF) mills starting to head south due to local power shortages and increasing production costs, Mysteel reported.

The utilisation among EAF mills surveyed by Mysteel reversed down by -4.73% week-on-week to a three week low of 40.08% on 18 August.

Singapore iron ore futures
Singapore iron ore futures (Source: TradingView)

Aluminium: Fundamentals at a glance

ANZ upgraded its demand estimates for aluminium on Wednesday amid a looming deficit expected to take place in 2023.

Estimates of growth was raised from 2.6% to 3.1% in 2022 and 4.0% growth is expected in 4.0%.

"However, this pales into insignificance when considering the supply side issues we expect to persist over the next 12 months. This should see the deficit widen, putting further upside pressure on aluminium prices," the analysts said.

"Disruptions to Russian supplies and energy shortages in Europe should keep aluminium and zinc balances tight. Depleted inventories and supply challenges are broadly supportive for the sector."

Aluminium spot price
Aluminium spot price (Source: TradingView)

Uranium: Policy stepchange, muted prices

Uranium spot prices were largely unchanged this week despite Japan's plans to restart idled nuclear plants and look at developing next-generation reactors, Reuters reported.

The comments from Prime Minister Fumio Kishida represents a massive turnaround since the Fukushima disaster in 2011, that mothballed nuclear reactors nationwide.

Not only does Kishida plan on restarting old reactors, but plans on building 'next-generation' ones as well in a bid to strengthen the nation's energy security and reduce carbon emissions.

In parallel, India's largest power producer was looking to develop another nuclear project, in-line with Prime Minister Narendra Modi's goal to more than triple the nation's nuclear fleet over the next decade.

On the flip side, German Economy Minister Robert Habeck ruled out extending the lifespan of the country's three remaining nuclear power plants. Plus drying rivers and corrosion issues has prolonged the shutdown of four nuclear reactors in France, a country that generates approximately 70% of its electricity from nuclear.

Uranium spot price
Uranium spot price (Source: TradingEconomics)

 

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Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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