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 <.IO62-CNO=MB> rose 2.7 percent to close at $71.64 a tonne, while London-traded copper futures gained 0.6 percent to $6,988.50 a tonne.
China's real estate investment over the first two months of the year grew 9.9 percent from the same period a year ago, marking the fastest pace since 2015.
Industrial output in the January to February period gained 7.2 percent from the same period in 2017, beating the market consensus forecast of a rise of 6.1 percent and coming in well above December's 6.2 percent 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 percent from the January to February period last year, crude oil up by 10.8 percent, copper by 9.8 percent and coal by 14.4 percent.
But despite the strength in China's commodity demand, prices have at best meandered so far in 2018, with iron ore down 1.3 percent from the end of 2017 to Wednesday's close, LME copper lower by 3.6 percent and Brent crude oil down by almost 3 percent.
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.
GEOPOLITICS MAKE A COMEBACK
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 percent tariff on steel imports and 10 percent 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 percent 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 percent 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.
The potential for Trump's policies to impact other commodities is also looming large, with the firing of Secretary of State Rex Tillerson and his planned with replacement with Central Intelligence Agency head Mike Pompeo raising concerns over the future of Iran's crude exports.
Pompeo is believed to be more aligned to Trump's view that the deal between Western powers Iran over the Islamic Republic's nuclear programme was bad, and needs to be re-negotiated.
This raises the chance of the U.S. administration de-certifying the nuclear deal, a move that could lead to restrictions on Iran's crude exports, an eventuality that could tighten the market and raise prices.
Brent crude futures didn't show much reaction to Tillerson's sacking, gaining a mere 0.4 percent on Wednesday.
But what Trump has done for crude oil, and for other commodities, is put geopolitical risk back on the agenda.
While it may not yet have displaced the interplay between supply and demand as the main driver of markets, a focus on geopolitics has to be on the radar screen of producers, traders, investors and buyers.
Commodity markets with deep and liquid markets, such as crude oil and natural gas, are more at risk of sharp increases in geopolitically-driven volatility, but even those where futures contracts are limited, such as coal, iron ore and liquefied natural gas, will be affected.
By Clyde Russell