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Base Metal Commentary

By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region

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Base Metals Ignore Record Chinese Stimulus in June, With Market’s Focusing on the Potential for Higher Energy Prices by Year-End
 
Natalie Scott-Gray
Natalie.scott-gray@stonex.com
natalie.scott-gray@stonex.com
 

 

As we enter Q3, a continued weak performance across the base metal suite is highlighting the level of concern in the market towards recessionary fears becoming a reality, leading to slower growth (upon higher energy prices and interest rate rises), while China’s H2 recovery remains on the backfoot upon the spread of a sub-variant of Omicron (known as BA.5). As it stands, the base metal suite has fallen to its lowest level since February 2021 (while the U.S. dollar has jumped to its highest level since June 2002, upon safe-haven purchases). Focusing on China, despite the release (on 11th July) of a record level of aggregative credit in June, a lack of physical demand in the country for raw materials (upon high inventory levels) is holding back price gains, although the release of trade data (on 13th July) should be able to tell us more. 

LME COPPER VERSUS THE U.S. DOLLAR

Source: Bloomberg
 

BASE METAL INDEX (W/W PERFORMANCE)

Source: Bloomberg
 

China’s Stimulus in June Hits a Record

Both China’s total social financing and new yuan loans came in above market expectations for June (typically a robust month for credit given the quarter-end), with total aggregative financing at its highest level for the month on record, pushing total M2 money supply to its highest level since November 2016. Looking into the detail, we expect that much of this increase has been driven by growing pressure from the PBoC to increase lending, in addition to a shift towards infrastructure stimulus (with policy banks being allocated 1.1Tr yuan for projects, in addition to 1.4Tr yuan going towards special bond issuances in June – a new record level). In addition, further positive sentiment should be taken from the rise in new corporate medium and long-term loans (which are used as a proxy for companies’ wiliness to increase investment), which jumped to another record level (for the month of June). However, despite this positive outlook for stimulus, it is worth noting that infrastructure projects in this case largely are attributable to ‘new’ infrastructure projects, such as 5G networks, data centres and EV charging, which although it is supportive for metals such as copper and aluminium, is less supportive for traditional (infrastructure) components such as steel. In addition to this (putting further COVID-19 spreads to the side), concerns remain for the property and manufacturing sectors, which will rely less on outright stimulus and more on regulatory policy and external demand (respectively). (Please note here, China’s latest trade data for June will be released on 13th July). Meanwhile, given that there are little signs of a pickup in physical demand for the metals in the country, optimism remains subdued for the base metal suite, as inventories continue to show gains on a YTD basis. 

BASE METAL SHFE STOCKS YTD CHANGE

Source: Bloomberg

CHINA’S TOTAL AGGREGATE FINANCING & NEW YUAN LOANS

Source: Bloomberg
 

 

Inflation in China Remains in Check – Is There Room for Further Policy Easing?

Despite China’s CPI figure for June coming in at 2.5% (up from 2.1% in May) and above market expectations of 2.4%, it is understood that much of this lift came from rising pork prices, as the core-CPI figure lifted only marginally to 1% (from 0.9% in May), indicating that consumer spending and overall demand remain moderate. Furthermore, with PPI prices having fallen back to their lowest levels since March 2021 (continuing to come of the peak in October 2021), there is argument enough to interpret that the PBoC will have room to further ease monetary policy to help support economic growth this year. Looking to market outlooks, the World Bank has forecast Chinese GDP growth at just 4.2% in 2022 (way off the target set by the Government of 5.5%).

China’s Latest COVID-19 Update

 DAILY CONFIRMED COVID-19 CASES IN CHINA

Source: ourworldindata.org
 

•    A new sub-variant of COVID-19’s Omicron (BA.5) is the driver behind a resurgence in cases in the country (with it being detected in Beijing, Shanghai, Xian and Tianjin). 
•    Shanghai will move forward with another round of mass testing (12-14th July), following a previous round of testing last week (5-7th July). Concerns on social media (alluding to a 100-day lockdown in the city) has resulted in residents turning to restocking, although officials have so far denounced the rumour. 
•    Various ‘partial’ lockdowns are taking place in cities such as Lanzhou (in northern China) and Xian, where schools, in-dining restaurants and entertainment venues will be closed. 
 
CSI 300 & SHANGHAI COMPOSITE INDEX TAKE A HIT

Source: Bloomberg
CHINESE CPI VERSUS PPI
Source: Bloomberg
 

What to Watch – 22nd July for the Return of Natural Gas Flows from Nord Steam 1 Pipeline

Over the last three weeks, natural gas prices within Europe have been underpinned by a limited flow of material to Europe (via the Nord Stream 1 pipeline), with capacity running at ~40%, with Russia’s Gazprom blaming a delayed return of equipment (serviced by Siemens Energy in Canada). As it stands, the Nord Stream 1 pipeline has just entered a routine period of maintenance (from 11-21st July); however, our attention will be focused on the level of output from 22nd July, as this could set the tone for what we can expect (regarding future flows) in H2. Indeed, with Russia already having cut gas supplies to Finland, Poland and Bulgaria (in addition to power companies such as Denmark’s Orsted, the Netherlands’ GasTerra and Shell - for not paying for contracts in roubles), concerns are mounting that any further cuts (especially in the winter months), will only compound inflationary fears in the bloc and lead to power rationing, denting demand.    

EUROPEAN NATURAL GAS, THERMAL COAL & BRENT CRUDE OIL PRICES

Source: Bloomberg
 
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