There are times when market action isn’t tough to figure out and the recent rally in base metals is one of those times.
For all the talk of the lithium, nickel and magnesium that would be needed during a surge in electric vehicles, broader metals prices continue to be driven primarily by Chinese imports and also by rising global manufacturing activity.
The catch is that forecasts for the Chinese economy imply the rally could be short-lived. China’s dominance in global commodity markets is highlighted by the fact the country consumes half of the global supply of copper and coal produced each year.
The top chart below, comparing year-over-year growth in total Chinese imports with the year-over-year change in the S&P/GSCI Industrial Metals Index, shows the dramatic effect Chinese demand has on metals prices.
The two lines on the chart have tracked closely since early 2009, when a gargantuan surge in China’s money supply and credit growth (not shown on chart) led to a surge in infrastructure development and imports. With a short delay, metals prices followed closely behind.