The prices of major non-ferrous metals such as copper have dropped by 20-30% compared to their peak levels this year, indicating that China's economic recovery, known as the "world's factory," is falling short of expectations following the reopening after the COVID-19 lockdown. Market analysis suggests that this is a signal of global economic slowdown.
Firstly, China's manufacturing sector is still struggling to regain momentum. According to the National Bureau of Statistics of China, the Purchasing Managers' Index (PMI) for May stood at 48.8. This figure is significantly lower than the previous month's reading of 49.2 and market expectations of 51.4.
China's monthly manufacturing PMI dropped to 47.0 in December last year but showed signs of recovery for three consecutive months from January to March this year, surpassing the benchmark of 50. However, it has remained in a contraction phase for two consecutive months since falling below 50 again in April. PMI, which is based on surveys of purchasing managers in companies, serves as an indicator of the business trend in relevant sectors, with a reading above 50 indicating expansion and below 50 indicating contraction.
The recovery of consumption, which accounts for 60% of China's Gross Domestic Product (GDP), is also progressing slowly. The non-manufacturing PMI, which reflects the performance of sectors such as services and construction, recorded a reading of 54.5 in May, maintaining an expansion phase. However, it fell short of the previous month's reading of 56.4 and the market expectation of 55.0. There is growing anticipation that the recovery of the domestic market will continue to be sluggish due to the sharp increase in the youth unemployment rate, a key indicator of consumer market sentiment.
The unemployment rate for Chinese youth (aged 16-24) reached a historic high of 20.4% in April, with Citigroup predicting that the youth unemployment rate could rise to over 25% when around 12 million new graduates enter the job market this summer.
Reuters reported that "China's manufacturing sector is contracting faster than expected due to weakened demand," and it evaluated that both manufacturing activity and the consumption-driven recovery are losing momentum, putting pressure on the economy.
China is the world's largest consumer of copper, accounting for 60% of global copper demand. Copper demand for construction wiring in China is particularly high, but real estate development investment in China decreased by 6.2% in the first four months of this year compared to the same period last year. The People's Bank of China has failed to meet market expectations for interest rate cuts by keeping the Loan Prime Rate (LPR) unchanged for eight consecutive months.
The Nikkei reported that although the Chinese real estate market was expected to recover after the COVID-19 pandemic, real estate companies are facing difficulties in raising funds and are not actively investing in new projects.
Real estate accounts for about 30% of China's GDP, and the recent financial strain on local Chinese governments, which have relied on land use rights income, has led to mounting fiscal issues. With the decline in infrastructure investment capacity, it has become increasingly difficult to sustain economic growth through fiscal spending.
According to the London Metal Exchange (LME), copper prices fell to $7,910 per ton last week, down by about 20% from this year's peak of $9,436.
As of the 26th, copper inventories on the LME reached 97,725 tons, the highest level since November last year. Zinc and aluminum prices have also dropped by 17-36% compared to the beginning of the year.
In the case of copper, the price difference between spot and futures prices, known as the "super-contango," has reached its highest level in 17 years since 2006. This phenomenon refers to the situation where the spot price, due to a lack of demand, falls below the futures price, surpassing the normal price spread between the two due to interest and storage costs in the commodity market.
In this regard, the Financial Times pointed out, "Global demand is weakening as China's economic rebound stagnates." Goldman Sachs, an American investment bank, revised down its average copper price forecast for this year from $9,750 per ton to $8,698 per ton, reflecting the possibility of an economic downturn.
Copper is widely used in various industries, including infrastructure, vehicles, construction materials, electronics, and machinery. Due to its widespread use, copper demand serves as a leading indicator for global economic conditions and is often referred to as "Dr. Copper." Copper prices generally rise during periods of economic recovery and fall during downturns.
In fact, during global economic downturns such as the 1997 Asian financial crisis, the 2008 Lehman Shock, and the 2020 COVID-19 pandemic, copper prices plummeted ahead of other economic indicators.
The downward pressure on copper and other commodity prices is attributed to the weakening demand from China, as well as ongoing financial risks from the United States, uncertainties related to debt ceiling negotiations, and other factors. However, some analysts also predict that the increasing demand for renewable energy and electric vehicles could lead to a surge in copper prices later this year, as copper is an essential metal for internal wiring in electric cars and wind power generation facilities.
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