Copper and zinc prices have risen sharply in recent weeks, with copper prices rising by 4.5 percent and zinc prices rising by 6 percent. Steel and iron ore prices too are on a tear, trading at 4- and 5-month highs.
These trends can be attributed to a number of factors, including China's move away from its Zero Covid policy and an increase in demand for these metals in the industrial and construction sectors. Additionally, restocking ahead of the Lunar New Year holidays has also contributed to the rise in prices.
Also fuelling the rally is China’s decision to inject CNY 85 billion through reverse repos to boost its economy and to provide $162 billion in new credit lines to private developers.
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With the US Federal Reserve dialling down its aggressive monetary tightening, contributing to a sharp fall in the US dollar index, investors are more positive on commodities than they have been in recent times.
A strong dollar is typically bad news for commodities because it means a weaker currency for commodity-importing nations, making it costly for them. This then hurts demand for commodities, and hence their prices.
Leading investment banks are taking notice. Goldman Sachs has rated commodities as the best-performing asset class for 2023, and Morgan Stanley is bullish on Chinese assets in general as the reversal of Covid curbs will boost economic activity and hence growth.
Technical factors are at play as well. Elevated energy prices have hit smelting in Europe and Africa, causing a decrease in global copper smelting activity which is at its lowest in 6 years. Inventories of zinc on the London Metal Exchange to have fallen by 90 percent in 2022.
Low inventory is an issue with silver as well, which is trading at an 8-month high, as inventories of the precious metal on Comex is down 70 percent since July 2021.
With China announcing plans to ramp up efforts to regulate prices and crack down on malicious price speculation, it's expected that there will be ongoing fluctuations in prices for these metals in the coming weeks.
Also Read | China hits back at South Korea, Japan in first Covid retaliation
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