LAUNCESTON: Copper and iron ore, the industrial metals most likely to benefit from China's renewed growth, have enjoyed strong starts to the new year but they run the risk of rallying too hard, too quickly.
No doubt investors have been cheered by the avoidance, for now anyway, of the fiscal cliff in the United States and growing signs that China's economy is re-accelerating after achieving a soft landing last year.
Asian spot iron ore gained 3.4 percent in the first two trading days of 2013, taking it to $149.80 a tonne, a rally of 73 percent since the low of $86.70 in September last year.
London copper rose 2.7 percent the past two days to $8,149 a tonne, taking its gains since its low last June to 12.3 percent.
Shanghai copper didn't trade for the first three days in January due to Chinese holidays, but by 9 a.m. local time Friday it had gained 1.2 percent to 58,390 yuan ($9,268) a tonne, up 14 percent from the low last year, also recorded in June.
What copper and iron ore have in common is that they all declined as the market feared a hard landing in China, and all started to recover when it became clearer that these concerns were overblown and that the elusive soft landing was more likely.
But the recovery in China's key manufacturing sector is still modest, and certainly nowhere the scale of the rally seen after the global financial crisis and recession of 2008-09.
The official Purchasing Managers' Index held steady at 50.6 in December, it's third consecutive month above the 50 mark that separates expansion from contraction.
The official survey was slightly more muted than the HSBC PMI, which rose to 51.5 in December, its highest reading in 11 months.
However, the official survey captures more of the large, state-controlled industries that are key to metals demand, while HSBC focuses more on smaller enterprises.
The official PMI recorded a 2012 low of 49.2 in August, meaning it has gained 2.8 percent since then.
This is a small rally compared to between November 2008 and December 2009, when the PMI gained from 38.8 to 56.6, a jump of 46 percent, and even well short of the 8.8 percent gain recorded between November 2011 and April last year.
The huge jump in the PMI in 2008-09 was matched by similar gains in metal prices, with iron ore surging 216 percent between late March 2009 and April 2010 and Shanghai copper, expressed in US dollars, gaining 177 percent between December 2008 and January 2010.
This means that roughly iron ore's rally in percentage terms was 4.7 times that for the PMI and copper's was 3.8 times.
In contrast, iron ore's rally from last year's low is 26 times that for the PMI, while Shanghai copper's is more subdued at 5.5 times, and London copper is 4.4 times.
These calculations suggest that while copper hasn't rallied excessively relative to the improvement in the Chinese PMI, iron ore is well overbought.
However, it's worth bearing in mind that iron ore had a much larger fall in the middle of 2012 than copper.
The steel-making ingredient plummeted 42 percent between April 10 and Sept. 5 last year, while Shanghai copper, in dollar terms, retreated 14 percent between February and June.
The Chinese PMI dropped 7.7 percent between April and August last year, meaning iron ore's decline was 5.5 times bigger than that for the PMI, while copper's was only 1.8 times.
However, even copper has rallied harder, relative to the gain in the Chinese PMI, than it did in the 2008-09 rebound.
It's also worth noting that in previous bullish periods, both metals peaked about three months after the PMI, so it also appears that so far in this rally, iron ore and copper are front-loading their gains.
While the rally may well run for some time, especially if the Chinese PMI continues to improve, it may be the case that the pace of gains in copper and iron ore eases.