Iron ore, copper crumble as China’s property downturn worsens

Article By: ,  Market Analyst
  • China’s May “data dump” was unambiguously weak
  • Property starts and sales slump over 20% in early 2024 relative to a year earlier
  • Output in downstream industrial products is holding up in selective areas
  • Iron ore and copper futures remain pressured

Mixed messaging on China commodity demand

Chinese property prices are tumbling nearly as fast as construction activity, amplifying downside risks for industrial metals such as iron ore and copper given bloated inventories and knowledge China’s property sector is the largest source of demand globally. Yet, despite acute weakness, fresh data on industrial activity suggests China is ramping up production of downstream refined products, creating doubt over whether the downside risk will materialise.

Given significant uncertainty on the demand outlook, it may be preferable to let the price action tell us what to do rather than pre-empt on fundamental grounds.

Chinese industrial activity softens

China’s “data dump” for May was unambiguously weak with industrial output and urban fixed asset investment undershooting already subdued market expectations.

Industrial output grew 5.6% over the year, down from 6.7% in April and below the 6% pace expected. Fixed asset investment, tracking physical structures designed to last two years or more, rose 4% between January and May relative to the same period in 2023, down on the 4.2% pace in the first four months of the year.

Property sector downturn worsens

Contributing to weakness in those measures, property sector activity continued to tumble with sales and starts sliding 20.3% and 24.2% respectively between January to May relative to a year earlier. Broader investment declined 10.1% over the same period, an acceleration on the 9.8% drop in the first four months of the year.

Separately, Chinese new home prices fell 0.7% in May, according to Reuters calculations, extending the decline over the past year to 3.9%. The monthly drop was the fastest since October 2014 and eleventh in succession.

The data weakness weighed uniformly on industrial metals prices on Monday. However, looking at trends in industrial output, it suggests there may be grounds for caution. 

Curiously, crude steel output rose 8.1% to 92.86 million metric tonnes, up 2.7% on May 2023 and the highest total since March 2023. A pickup in steel exports and improved demand from infrastructure investment may have contributed to the result.

Year to date, steel production stood at 438.61 million tonnes, down 1.4% on the same period in 2023.

SGX iron ore facing bearish reversal?

While there’s time left in the trading session, the possible bearish engulfing candle on SGX iron ore futures looks ominous on the daily, suggesting buyers parked below $104 last week may have more offers to absorb soon.

Should futures break and close below $104, it would increase the risk of the downside flush extending below $100 with the April low of $95.40 potentially in play. Traders could sell the break with a stop above $104 for protection, should the price move in that direction.

If $104 were to hold, traders could buy the dip with a stop loss below $103.50 for protection. The initial target would be $108 where the price stalled on several occasions earlier this month. With momentum indicators and fundamentals looking bearish, this trade screens as a low probability play

COMEX copper teetering

Copper is another contract that finds itself in an interesting level, perched on support at $4.447, continuing the pattern since June 7. While iron ore hardly screams buy right now, it does look healthier than copper which has broken its uptrend running from February and 50-day moving average, two important levels that warn of a shifting directional risks.

If $4.447 were to give way, wait to see how the price interacts with $4.396, a level that acted as support and resistance earlier this year. If that too were to buckle, traders could sell the break targeting $4.25 or even $4.164. As stop above $4.447 would offer protection.

If the price were to bounce from $4.447, you could buy targeting the 50-day moving average with a tight stop below for protection. This screens as a lower probability play given bearish momentum.

-- Written by David Scutt

Follow David on Twitter @scutty

 

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.

© FOREX.COM 2024