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China and COVID: implications for global base metals markets

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China’s strict response to the latest wave of Covid, which has now started spreading in the city’s capital Beijing, is raising concerns over how the restrictive measures will affect the local economy.

Shanghai, which at 25 million people is China’s biggest city and major regional industrial and transport hub, has been under strict lockdown measures since 28 February when the latest wave of Covid infections started spreading. But just as one or two restrictions started in the city have been removed the occurrence of new infections in Beijing has prompted a similar reaction in the capital.

Apart from concerns over human health and wellbeing the latest wave of Covid is causing concerns in the commodities markets because of the country’s disproportionately important role on the global stage as the largest importer and consumer of metals.

Is Chinese Covid in the commodities driving seat now?

Copper futures have dropped around 10% from a peak in March but the fall was slightly cushioned by the European Union’s plan to stop importing Russian oil and the subsequent spike in Brent crude prices to $113 a barrel. The decline, however, could become more pronounced over the coming weeks if the number of cases in Beijing continues to rise.

For the moment the number of new infections is only in the lower tens, which seems low for a city of 21 million people, but the drastic response which included closing of 60 underground stations and 100 bus routes will have massive implications for how the capital operates. At the moment, another 45 Chinese cities are in some form of lockdown and people are advised to work from home. The restrictions are seriously hampering parts of the country’s industrial production, manufacturing and construction.

Before the latest wave of Covid China’s GDP was expected to grow at 5% this year and then pick up slightly in 2023 to 5.2%. This is a far cry from between 10%-14% of annual growth seen in the two decades since the start of this century and before the outbreak of Covid. China’s slowdown is happening against a wider slowdown in global economic recovery caused by the war in Ukraine. The IMF recently corrected down its forecasts for global economic growth this year to 3.6%, down from 6.1% in 2021, and 0.8% lower than it had initially foreseen.

GDP growth and demand for metal intrinsically linked

GDP growth directly correlates to growth in metal demand, particularly copper, which is used in construction, cars and piping. LME three-month copper futures are currently trading at $9,480 a metric tonne.

The price of aluminium, also used in a wide range of industrial applications, has dropped below $3,000/m, the lowest level since early January. LME nickel prices are the only ones following a different curve, dropping down to around $30,000/t from a peak of $100,000/t caused by a speculative squeeze.

Before the latest wave of Covid broke out in Shanghai the country had just begun turning a corner in terms of economic and industrial growth. It imported a record amount of aluminium in 2021 while imports of refined nickel doubled year-on-year. In contrast, imports of refined copper adjusted lower after a record high in 2020 but remained fairly strong. Next month’s industrial production data and the Purchasing Managers Index (PMI) for manufacturing will give a clearer indication whether industrial demand is holding up.

Copper ETFs from WisdomTree

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Copper
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
GB00B15KXQ89 COPA USD
WisdomTree Copper – EUR Daily Hedged
EQi
JE00B4PDKD43 ECOP EUR
WisdomTree Copper 1x Daily Short
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00B24DK645 SCOP USD
WisdomTree Copper 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00B2NFTF36 LCOP USD
WisdomTree Copper 3x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
IE00B8JVMZ80 3HCL USD
WisdomTree Copper 3x Daily Short
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
IE00B8JVMZ80 3HCS USD

Aluminium ETFs from WisdomTree

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Aluminium
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
GB00B15KXN58 ALUM USD
WisdomTree Aluminium 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | EQi
JE00B2NFTC05 LALU USD

Nickel ETFs from WisdomTree

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Nickel
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
GB00B15KY211 NICK USD
WisdomTree Nickel – EUR Daily Hedged
EQi
JE00B6XL6W59 ENIK EUR
WisdomTree Nickel 1x Daily Short
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00B24DKJ77 SNIK USD
WisdomTree Nickel 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00BDD9QB77 LNIK USD
WisdomTree Nickel 3x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00BYQY5X15 3NIL USD

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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