Turn your mind back six months ago…January 2023.
Markets were in a frenzy predicting enormous growth in Asia as China emerged from its three-year lockdown.
Commodity stocks were pounding into new highs…lithium had just soared to an all-time high.
The sleeping tiger was awakening, and global markets were ready to embrace it after a year of pain on US and European markets.
But the outlook was quickly deflated…
Rather than explode back to life, this sleeping tiger continues to stumble its way out of a three-year coma, failing to meet the high expectations from abroad.
In April, Chinese industrial production rose by 5.6% year-on-year…which fell well short of the 10.9% predicted by economists in a Reuters poll.
But is that really a surprise?
We’re talking here about a $16 trillion economy, the second largest in the world.
You could say these strong expectations were a little overzealous.
Giants take time to move, and this is what’s happening in the Chinese economy.
Yet, despite that, the People’s Bank of China (PBOC) seems ready to push growth up a notch…
On Tuesday, authorities made sweeping announcements that could breathe new life into the 2023 China reopening story.
The first of those was a cut in the central banks’ seven-day reverse repurchase (repo) rate by 10 basis points from 2% to 1.9%.
Effectively, a cut will filter down to commercial and private borrowers helping to prop up the weakened property sector.
This was the first time in 10 months that the PBOC cut rates.
China’s central bank also lowered the interest rate on its standing lending facility (SLF) — cutting the overnight rate by 10 basis points to 2.75% — while injecting 2 billion yuan (US$280 million) through its short-term bond instrument.
But so far, the market has fallen flat on the news…not surprising.
After a false start earlier in the year, investors have lost their patience.
But that could be a lost opportunity…potentially missing out on the REAL reopening of the Chinese economy.
As Bloomberg highlighted, these latest stimulus announcements could mark a new beginning for the Chinese economy…the stage is now set for much broader stimulus as the government looks set to tackle deflationary fears with new vigour.
That’s certainly sparking interest in one area of the economy…copper.
Having bounced to the upside by around 7.5% in the last two weeks, copper futures continue to consolidate above their May low.
But for certain copper producers the ‘bounce’ has been far stronger.
Is copper staging a comeback?
Focusing on the majors, there’s good reason to believe a recovery in the copper sector is already underway…
The $60 billion Swiss mining giant Glencore has accelerated by 15% over the last two weeks.
While the US-owned pure copper miners, Ivanhoe Mines and Southern Copper Corporation, have both jumped by 19% and 13%, respectively, since the start of June.
The recent activity among these producers aligns with projections from the International Copper Study Group (ICSG), which predicted copper supply deficits BEFORE the end of 2023.
According to the research group, a supply deficit of around 114,000 million tonnes is expected later this year.
That compares to a surplus of about 155,000 million tonnes forecast in October last year.
The reason for this surprise deficit?
Higher than expected consumption in China…again, not something most analysts would expect given the lacklustre growth in 2023.
Yet with the latest stimulus announcements deficits look much more likely.
Given that copper prices were deteriorating all through April and May, the ICSG’s forecasts were highly contrarian going against the grain of mainstream sentiment.
That’s because the ICSG is one of the few firms closely monitoring Chinese demand for copper…again, demand here continues to beat expectations.
Adding large-cap copper producers on the back of ICSG’s analysis would have seen investors pick up some tidy gains…
As a reader of Fat Tail Commodities, you’ll know that I’ve been pushing this opportunity for months!
It’s why we added copper stocks to the Diggers and Drillers publication at the depths of the market lows in April and May.
Expect to see more commentators play up the copper story now.
So, is it too late to capitalise on the emerging recovery?
Given we’ve already seen strong double-digit gains amongst some of the world’s largest copper producers, I expect this trend to move quickly.
But for the most part, explorers and developers have moved little.
Right now, that’s where I see the value.
But I don’t believe it will last…
As Reuters reported, the Chinese Government is likely to follow up its recent announcement with a broad suite of stimuli targeting its ailing property sector.
I believe you still have a small window to capitalise on depressed prices at the smaller end of the copper market.
If you’ve been sitting on the fence, there’s still time to add our latest copper recommendations to your portfolio…
You can access all the details here.
Until next week.
Regards,
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James Cooper,
Editor, Fat Tail Commodities
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