Rising COVID cases put China’s recovery on hold and affect copper prices
The highly infectious BA.5.2 sub-variant of the coronavirus has arrived in China as Beijing issues its first vaccine order. Meanwhile, Covid cases in Shanghai reached their highest level since late May. The city continues to struggle with the micron variant. Since Shanghai came out of lockdown, China has turned to targeted quarantines. The latest jump in cases will once again test China’s resolve for zero COVID-19. Up to this point, China has resisted another full-scale lockdown. The apparent hesitation suggests a subtle shift in China’s strategy. However, another lockdown could remain on the horizon if the number of infections exceeds a certain threshold. The latest lockdown caused widespread damage to China’s economy. The Caixin Manufacturing Index PMI shrank to a 26-month low in April. Additionally, a recent Bloomberg report suggests that China’s GDP likely contracted in the second quarter. This is contrary to any number the CCP will publish. While copper prices peaked in March, subdued demand from China triggered the start of the downtrend in prices. The impact of restrictions in China began to take effect in the second half of April. The price decline continued after a brief recovery. However, it failed to surpass its previous high as Shanghai came out of lockdowns. However, the bearish focus shifted to growing fears of an economic recession in the West. China’s recovery has so far failed to reverse the downward momentum. However, any pullback could accelerate the current freefall in prices which are now nearly 30% below their March 7 peak. Infrastructure or Bust? As China weighs its next steps to manage COVID, it continues to look to infrastructure to meet its growth goals. According to a recent Reuters report, China will set up a sovereign wealth fund for infrastructure investment totaling nearly $75 billion in the third quarter. Its latest moves follow President Xi’s commitment in late April to a “comprehensive” boost to infrastructure construction. While the projects will likely be expansive, Xi emphasized “scientific technology” infrastructure. China is also looking to build its digital economy. To fund its ambitions, China’s cabinet announced it would increase the credit limit for policy banks by $120 billion. It will also issue nearly $45 billion in financial bonds. The next plans already follow significant investments in the first half. According to data from the Office for National Statistics, infrastructure investment in the first five months of the year increased by 6.7% from 2021. Total planned investment in newly started projects increased by 23.3% over the same period.
Will China’s infrastructure stem copper price swings?
While China’s stimulus measures extend beyond infrastructure, infrastructure spending appears to be a priority. It is also not the first time that China has used this strategy. In 2008 amid the Great Recession, China’s State Council announced a $586 billion (CNY 4 trillion) stimulus package in November 2008. While the package expanded debt, it also boosted growth after a sharp decline. Copper prices also took note as the downtrend bottomed out in December. However, China’s efforts may not have the same effect in 2022. The projects announced so far will certainly benefit copper, but it remains unclear how overall spending will compare to 2008. In addition, China’s debt is very higher than in 2008. This, on top of its property sector and the damage already done by the zero-Covid approach, leaves China in a much weaker position. China’s current Covid restrictions also pose a risk. Even if they fall short of citywide restrictions, they come at the expense of a larger recovery and remain disruptive to any business or project. Whether China can manage its vulnerabilities and finance and execute enough projects to offset the brunt of the global economic downturn seems, at this point, unlikely. From AG Metal Miner More top reads from Oilprice.com:
