Positive Chinese economic data boosts sentiment

Positive economic data from China stocked further optimism of stronger fundamentals across energy and metals. Monetary policy was also in focus ahead of a week of central bank rate decisions.

Copper gained as positive economic data in China boosted hopes of stronger demand. Industrial output rose 7% y/y in Jan-Feb, the fastest growth rate in two years. Growth in fixed asset investment accelerated to 4.2%, while retail sales was roughly in line with expectations at 5.5%. The data dashed hopes of further stimulus measures from Beijing, leading to some selling across the base metals sector. However, that quickly gave way to the realisation that commodity demand should still be well supported by the current strong factory output. The current rally in copper is still underpinned by risks to supply at mines and smelters. Chinese copper smelters are threatening to reduce output as cutbacks at mining operations late last year have tightened the concentrate market and pushed treatment charges lower.

The positive economic data in China helped reverse earlier losses in the iron ore market. The rise in fixed asset investment should help support steel demand. However, hopes of a revival in the property market were dashed after the data showed investment in property development fell 9% y/y in Jan-Feb. China’s steel production was relatively unchanged in Jan-Feb, compared with the same period last year. This may change, with six Chinese mills in the Guangdong province planning to reduce output by 10-20% over the next month.

Crude oil hit a four-month high as supply side issues continue to plague the market. Ukrainian drone strikes over the weekend hit three oil refineries in Russia, which account for 12% of Russia’s total oil processing capacity. This has seen refinery margins pick up amid tighter availability of oil products in Europe. Iraq said it plans to cut oil exports to 3.3mb/d in coming months, from 3.43mb/d in February as it looks to compensate for producing over its OPEC+ limits in recent months. Strong factory output and investment growth in China also boosted sentiment. This has led to a record amount of crude being processed at the start of the year as refiners ramp up operations to meet strong holiday demand. The volume of oil reached 118.76mt in Jan-Feb, up 3% y/y. Trips in private vehicles soared, with expressway passenger volumes 54% higher than 2019 levels. Airlines saw 19% more people travel during the Lunar New Year holiday than the pre-pandemic peak.

Global gas prices extended gains amid rising risks to supply. Flows to the Freeport LNG export facility remain constrained following one production line going down. Norwegian exports are also lower due to an unplanned outage. This comes as Ukrainian attacks on Russian energy infrastructure raise the prospect of further supply disruptions to Russian LNG exports. At the same time, the EU is putting pressure on imports of Russian LNG to cut their purchases this year.