Commodity spotlight: Iron ore waits for a catalyst, coal rips higher, Dr Copper struggles

Iron ore: Waiting for a catalyst 

It was a rather uneventful week for iron ore as China was away Monday through to Wednesday for its Labour Day national holiday. The broad-based weakness across the market seems to be taking a slight toll on iron ore, set to close out the week towards US$140 a tonne. 

Iron ore futures (Source: TradingView)

Iron ore is in wait-and-see mode as the Chinese government is due to provide more details about “policy tools to support steady economic growth, stabilise employment and prices.”

China has promised plenty of stimulus and support in the past few weeks, though official statements come lacking in details.

This follows another set of depressing numbers from China’s top 100 property developers, reporting a -50.2% year-on-year decline in sales volumes between January and April, according to CRIC Research.

On a more promising note, Moody’s Investors Service said earlier this week that the persistence of weaker mining production and volume constraints will exacerbate tight commodity markets and further elevate prices of a basket of metals.

Moody’s observed that a number of large, diversified mining companies had posted first-quarter results showing weaker production and cost inflation. Further dragging production were covid-related labour constraints and weather-related disruptions taking place across Brazil, South Africa and Australia. 

Coal: Can’t stop won’t stop

Newcastle coal futures rallied another 3.9% overnight to a near 2-month high of US$374 a tonne. Prices are set to finish the week up around 25%.

It looks like fossil fuels are here to stay.

Newcastle coal futures (Source: TradingView)

Factors propping up coal prices this week include:

• Europe's largest coking coal producer expects output to be reduced by 400,000t following a coal mine incident

• Optimism about a Chinese reopening and stimulus to meet the nation's target of 5.5% economic growth

Dr Copper not looking so hot

Copper has been a historically lead indicator for the global economy given its acute sensitivity to global industrial output.

Copper prices went from breaking out in early March to a sharp reversal, back to its longstanding trading range.

Since the breakout high on March 4, copper has slumped -13%, which is quite a substantial pullback given the usual slow-moving nature of the commodity.

Copper prices (Source: TradingView)

Earlier this week, Finch Ratings cut its forecast for China's 2022 GDP growth to 4.3% form 4.8% on the assumption that the government will only gradually phase out its 'zero-covid' policy.

Back at home, the Reserve Bank cut its forecasts for unemployment, raised its outlook for inflation and cut back GDP growth to 3.5% from 5.0%.

It seems like global economies are facing various downward pressures stemming from covid and inflation. Though, this pullback is in-line with the broader market's selloff.

Things could begin to get worrisome for copper if it begins to test the low $4 level.