As the year began every sell side analyst was banging the table calling for the long reflation trade, and the long infrastructure stimulus induced trade, which meant being long most commodities that China and the rest of the world was demanding like copper, iron ore, steel and other construction related materials.
The rally started in earnest back in November 2020, after the Biden presidential election win where the price rallied from $6500/tonne all the way to $10500/tonne in May of this year. Since then it has stalled, and is now showing signs of fatigue. This is despite the roaring reopening of U.S. and European economies as they vaccinate the majority of their population.
Since last year we have continuously been hearing about all the decarbonization efforts and infrastructure spending boom not only in China, but in the U.S. and Europe as well. It started as governments embarked on fiscal policies aimed at generating GDP growth quick and fast to jump start their respective economies out of a recession. But this spending splurge has taken prices of most materials up to some very uncomfortable levels.
Given coronavirus induced shutdowns and delays, this has exacerbated the supply side to deliver on time and meet the requirements. One can see the global shipping and container prices sky rocketing and showing no signs of ease as port congestions remain tight. Simply put, demand is too much at a time when supply is just not able to match. Chile, the world's largest copper producer, is facing short term disruptions from labor negotiations and long-term disruptions from planned increases in mining royalties.
But starting this year, China started taking a different path. It has started easing its credit growth boom, taking its foot off the pedal a bit. This can be seen in M2 and Chinese credit impulse data. Just today we saw the highest PPI going back to September 2008, but CPI lagging, which implies that Beijing is not allowing its companies to pass all the costs to their consumers. If it did, that would kill the consumer that is fragile to begin with post the pandemic. But sooner or later, if they are unable to pass through higher costs, corporate profit margins will start to get hurt.
As China growth slowed in the first half of 2021, U.S. and European demand has been quite strong, and this has offset some of the weakness in Asia. This is one of the reasons why copper has held up quite well. We know the Biden/Congressional talks have broken down once again as they cannot agree on an infrastructure spending bill, which has also been one of the key reasons boosting the copper price higher in the near term.
For now, funds are not really that excited for copper either. They have lifted their net long positioning on CME copper from a mid-April low of 38,273 contracts to 66,421 as of a recent Commitments of Traders Report a few weeks ago. Even Chinese buyers are backing off now. The Shanghai Metal Market Tangshan copper premium SMM-CUYP-CN is a closely watched barometer of China's physical import demand. It is currently trading at $38.50 a tonne, the lowest print since 2017.
Now that financial assets have more than recovered back to last year's level, there is a case to be made of less QE going forward, lest inflation gets totally out of control. The job market is showing signs of growth, it's just people are not incentivized to look for a job, and why should they when Uncle Sam is handing out free stimmy checks. It remains to be seen what the Fed does, but the time is drawing near for them to take their foot off the pedal. We all know the structural case for the deficit in copper, and how it is one of the tightest commodity markets benefitting from EV, renewable energy and clean energy transition. But, as always, timing is critical.
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