‘Dr Copper’ and the diagnosis for China growth

'Dr Copper’, a nickname given to copper because of its ability to predict turning points in the global economy, is up nearly 7 per cent this year.

Its power as an indicator is linked to its widespread use in transport, construction, electricity networks and consumer goods.

But copper is not alone this year.

All other metals, with the exception of zinc, are also higher.

But this rally in base metals also appears to be ignoring clouds hanging over the global economy.  

These include questions over the series of executive orders from the White House and the promise to place tariffs on all US imports.

It also includes the fact China’s economic rebound has disappointed some investors – with its property sector weighed down by excessive debt and a historically high level of inventory.

So just what turning point has ‘Dr Copper’ diagnosed and what does it mean for the global economy?

Rising copper price suggests economic backdrop not as dire as first thought

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China: in the zone?

Firstly, recent data suggest China’s economy is improving.

This is evident in December’s stronger than expected retail sales (See “Key economic data from China” chart, below).

Key economic data from China

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At the same time industrial production increased by 6.2 per cent year on year.

Notably, the performances of automobile manufacturing (17.7 per cent), metal products and machinery and equipment (14.4 per cent) and electronic equipment (8.7 per cent) remain robust.

The down trend in other major developed economies has also reversed, raising hope of an industrial-led rebound.

Following strong declines through the third quarter of 2024, various purchasing managers indexes’ (PMI) manufacturing data broadly rose in the fourth quarter.

Growth returned in the US, with the PMI pushing into expansionary territory for the first time since May 2024.

Europe also improved, although overall activity remains contractionary.

Turning points

As mentioned before – copper appears to indicate turning points in the global economy, due to its widespread use in transport, construction, electricity networks or consumer goods (See “Copper end use demand by sector” chart, below).

Copper end use demand by sector

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In the first two months of the fourth quarter of 2024, China’s PMI manufacturing data moved back into an expansionary zone, and the nonmanufacturing data avoided contraction.

Domestic economic and market sentiment appear to have been bolstered by the government’s commitment to supporting growth.

Policymakers plan to double China’s GDP between 2020 and 2035, which would require an average annual growth rate of 4.7 per cent.

The actual growth rate since 2020 has been 4.6 per cent, and the forecast for 2025 is 4.3 per cent.

To reach the long-term growth rate target of 4.7 per cent, authorities plan to increase borrowing and provide outsized stimulus in 2025.

ANZ Research sees the risk to China’s GDP forecast as tilted towards the upside.

Copper demand appears to be recovering

China’s copper imports have been strong.

Copper product imports rose 21.8 per cent year on year to 602 kilotonnes (kt), the highest since October 2020.

Concentrate imports were also up marginally as the industry struggles with supply disruptions in South America.

However, total copper units (refined metal, copper scrap and copper ore) into China were up 3.5 per cent year on year in 2024, with most of the growth occurring in the fourth quarter. Other indicators also suggest strong demand.

Copper inventories held in warehouses controlled by the London Metal Exchange and Shanghai Futures Exchange fell steadily through the fourth quarter of 2024.

Downstream view

The ANZ Downstream Copper Demand Indicator suggests underlying conditions are also improving.

Our indicator tracks the copper post manufacturing to its final customer.

That is – it weighs what the copper is being used for and is being consumed across various sectors.

After stabilising through the second and third quarters of 2024, it rebounded into positive territory in the fourth quarter.

Investment in grid infrastructure, for instance, is growing as Beijing strengthens its network following recent energy shortages.

Total investment rose 18 per cent year on year in the fourth quarter of 2024, which will support both copper and aluminium demand in the power industry.

Likewise, sales of vehicles were also stronger, exacerbated by the rising market share of electric vehicles, which contains more than seven times the amount of copper than an internal combustion engine car.

The indicator also reveals phases of tightening and loosening in the Chinese market.

When growth in this indicator is lower than growth in apparent demand, it suggests inventories across the supply chain are building.

However, this doesn’t appear to be the case at the moment.

Manufacturers of copper products have been strongly expanding output, with growth hitting 10 per cent year on year in December 2024, but inventories of finished copper products are falling. Chinese copper wire inventories, for instance, hit a four-year low in December.

Ramping up production

ANZ Research believes manufacturers in China are ramping up production as the recently announced stimulus measures boost demand.

The slew of announcements, which included lowering borrowing costs and cutting the down-payment ratio for mortgages, fell short of previous packages.

Nevertheless, they have brought some stability and allowed businesses to plan with more confidence.

The liquidity support for the equity market, on the other hand, seems to have unleashed pent-up demand in capital markets.

A combination of greater stability in the real estate sector and stronger equity markets is likely to see consumer sentiment rebound.

That may lead to an economic rebound that would be important for commodity markets.

US economic and trade policies remain the wildcard

It is well known that US President Donald Trump commenced his second term with a series of executive orders and policy announcements.

Central to this has been his use of higher tariffs, which will increase the cost of US imported goods, of which 25 per cent are consumer goods.

This could lead to significant supply chain disruptions and ultimately raise inflation risks.

A subsequent pause in easing monetary policy by central banks globally would threaten the macro tailwinds that commodity markets are currently experiencing.

Moreover, the risk of a global trade war has escalated, putting at risk the growth in major regions such as Asia.

This region is now the main contributor to the US trade deficit and hence, at considerable risk from higher US tariffs.

ANZ Research’s core view remains that the global economy will avoid recession in 2025.

ANZ Research also believes that the Trump presidency will ultimately be disruptive rather than destructive.

President Trump’s goals, namely a strong US economy and a strong stock market, run counter to any sustained trade war.

This should provide a solid backdrop for the commodity sector.

Daniel Hynes is Senior Commodity Strategist at ANZ and Soni Kumari is Commodity Strategist at ANZ