LAUNCESTON, Australia, Mar 15 (Reuters): The tug-of-war between fundamentals and sentiment appears to be getting stronger for many commodities as the market tries to reconcile factors such as robust demand numbers from China and increasingly worrying rhetoric and actions from the United States.
Iron ore, steel and copper all performed well on Wednesday after Chinese data showed real estate investment and industrial output rising at a faster than expected pace.
Spot iron ore prices in China rose 2.7 per cent to close at $71.64 a tonne, while London-traded copper futures gained 0.6 per cent to $6,988.50 a tonne.
China's real estate investment over the first two months of the year grew 9.9 per cent from the same period a year ago, marking the fastest pace since 2015.
Industrial output in the January to February period gained 7.2 per cent from the same period in 2017, beating the market consensus forecast of a rise of 6.1 per cent and coming in well above December's 6.2 per cent growth rate.
Given that property and industry are among the major consumers of commodities like steel and copper, the price gains aren't that surprising as they seem to indicate that China's economy remains in a healthy state and likely to support strength in commodity imports in coming months.
Indeed, China's imports of major commodities were solid in the first two months of the year, with customs data last week showing iron ore imports up 5.4 per cent from the January to February period last year, crude oil up by 10.8 per cent, copper by 9.8 per cent and coal by 14.4 per cent.
But despite the strength in China's commodity demand, prices have at best meandered so far in 2018, with iron ore down 1.3 per cent from the end of 2017 to Wednesday's close, LME copper lower by 3.6 per cent and Brent crude oil down by almost three per cent.
While China isn't the sole factor driving commodity prices, it's clear that the current positive demand picture isn't enough to spark, or even sustain, a rally.
Instead market participants seem once again focused on the mounting risks posed by geopolitics, particularly in the form of the agenda of U.S. President Donald Trump.
The imposition of a 25 per cent tariff on steel imports and 10 per cent on aluminium spooked markets far more than the positive China data supported them.
Trump first announced he planned to impose the tariffs on March 1, and iron ore prices fell 11 per cent between March 2 and 12, before recovering slightly on the Chinese economic data.
China's exports of steel to the United States are a miniscule 0.1 per cent of its total production, so in theory the U.S. tariffs are inconsequential and should have zero to minimal impact on the country's demand for seaborne iron ore.
Yet iron ore prices slumped on the news of Trump's tariffs, not because of the expected immediate impact on demand, but rather on the concern that the U.S. government is prepared to wage a beggar-thy-neighbour trade war than runs the risk of sparking the next global recession.
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