DRC Bans Copper and Cobalt Exports - What Do We Need to Know?
DRC Bans Copper and Cobalt Exports - What Do We Need to Know?
Natalie Scott-Gray
- Base Metals
Base Metal Commentary - Feature Article
By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
Base Metal YTD Gains Are Wiped Out as Bearish Parameters Extend, But is There Light at the End of the Tunnel?
The base metal index is posting a negative 1% price performance on a YTD basis, falling to levels last recorded in December 2022, and reversing robust gains at the start of the year that saw the index hit a seven-month high. The key parameters behind this price weakness stem from a souring macro picture within the U.S. (upon Silicon Valley Bank’s receivership), alongside weaker than expected economic targets out of China’s annual Two Sessions meetings. In addition to this, the fundamentals picture for the suite remains weak, with a return in activity within China (upon the move away from zero tolerance policy at the start of this year), resulting in base metal production outstripping domestic demand. In today’s commentary, we outline the key driving forces that are weighing on base metal prices and summarise the key outcomes of China’s most important annual event, the Two Sessions.
Agenda:
• Key Takeaway’s from China’s Annual Two Sessions Meeting 2023
• U.S. Interest Rate Rises - 50 versus 25 basis point Rise in March Meeting?
• Our View on Near-Term Outlook for the Base Metal Market
• Key Takeaway’s from China’s Annual Two Sessions Meeting 2023
• U.S. Interest Rate Rises - 50 versus 25 basis point Rise in March Meeting?
• Our View on Near-Term Outlook for the Base Metal Market
LME Base Metal Index Price Performance
Source: Bloomberg
LME 3M Base Metal Price Performance YTD
NDRC Work Report Word Count
One of the key outcomes from the NDRC work reports highlighted the battle China faces towards trying to increase its dominance in green technology (likely to become its next large export market), while being constrained by the need to support economic recovery and avoid the power outages of last several years. Indeed, with total fossil fuel output last year having jumped by 10% Y/Y, and the lower energy intensity reduction target for 2023, we expect that the green transition within China may need higher growth rates in future years, while the country places economic recovery above environmental targets in the near-term. However, having said this, we forecast that robust spending from special local bonds this year will lean more towards green / renewable energy than traditional demand end sectors (i.e., the property sector). Therefore, we expect growth to remain resilient for our ‘green metals’.
Type or use Ctrl+Shift+V here to paste source
Source: Bloomberg
KEY TAKEAWAY’S FROM CHINA’S ANNUAL TWO SESSIONS MEETING 2023
What Is China’s Two Sessions?
China’s annual ‘Two Sessions’ meetings refers to two separate meetings (that occur around the same time), made up of the National’s People Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC). Please note, the CPPCC is an advisory body, and the NPC is China’s top legislative body. These meetings run from 4th March to 13th March, starting with the CPPCC.
Why Are They Important?
It provides a chance for China to analyse its development and set targets and goals for the year ahead for both domestic and foreign affairs. Sectors covered include the economy, environmental protection, and trade issues.
What Have been the Key Highlights so far?
• The release of key economic targets
• President Xi’s Opening Remarks
• National Development and Reform Commission (NDRC) Work Report Word Count
The Release of Key Economic Targets
Markets were disappointed upon the release of China’s annual economic targets, given only a moderate outlook for growth, stimulus, and job creation:
• Firstly, GDP was set at ~5% for 2023, which missed market forecasts (of between 5-6%) and marked the country’s lowest target level of growth in 30 years.
• Fiscal deficit was set at 3% of GDP which was higher than the 2022 target of 2.8%, but in reality, with spending having risen to 4.7% of GDP by year end 2022, this is being seen as a pull back.
• Meanwhile, we have a similar situation for the issuance of special local government bonds (which reflects expected spending on infrastructure), with the target coming in at 3.85Tr (higher than the 3.65Tr target in 2022), but below the actual level of spending of 4.15Tr by year-end 2022.
• New urban job creation, although coming in with a target of 12M (1M higher than the target in 2022), following comments from the Minister of Human Resources, this target is far below what is needed when you account for the influx of new graduates, migrants’ workers and the currently unemployed (with a proposed figure of 16.9M new urban jobs required).
• Coming to energy intensity, following no target set last year (as China concentrated on economic recovery), this year it is being set at ~2%, which is down from 2021 levels of 3%. Here despite a pledge to control fossil fuel use being mentioned, coal was highlighted as the country’s main fuel source for this year.
China’s Key Target Outcomes of the NPC 2023
Source: Bloomberg
President Xi’s Opening Remarks
President Xi Jinping’s comments at the start of the Two Sessions event, notably targeted the United States as ‘enemy number one’, in arguably one of the most public and direct manners in recent years. Indeed, Xi stated that “Western countries led by the United States have contained and suppressed us in an all-round way, which has brought unprecedented severe challenges to our development”. This comes on the back of the release (via state media) of a report highlighting the United States’ 4,000 “sins” over the last 200 years. Furthermore, China’s new Foreign Minister Qin Gang stated on 8th March (in his first appointment in the position) that “conflict and confrontation” with the United States is inevitable if Washington does not change course, stating that “catastrophic consequences” could occur. In our view, the building tensions between these two countries could act as a significant downward risk over the course of 2023 for our markets.
President Xi Jinping’s comments at the start of the Two Sessions event, notably targeted the United States as ‘enemy number one’, in arguably one of the most public and direct manners in recent years. Indeed, Xi stated that “Western countries led by the United States have contained and suppressed us in an all-round way, which has brought unprecedented severe challenges to our development”. This comes on the back of the release (via state media) of a report highlighting the United States’ 4,000 “sins” over the last 200 years. Furthermore, China’s new Foreign Minister Qin Gang stated on 8th March (in his first appointment in the position) that “conflict and confrontation” with the United States is inevitable if Washington does not change course, stating that “catastrophic consequences” could occur. In our view, the building tensions between these two countries could act as a significant downward risk over the course of 2023 for our markets.
Please note, the defence spending target for 2023 was set just 0.1% higher than in 2022 to 7.2%, pushing it up to 1.28% of China’s overall GDP (and lower than the global average of 2%). However, we have seen a marked increase over the last several years of spending here, with the 7.2% target well above the 6.6% level in 2020.
NDRC Work Report Word Count
One of the key outcomes from the NDRC work reports highlighted the battle China faces towards trying to increase its dominance in green technology (likely to become its next large export market), while being constrained by the need to support economic recovery and avoid the power outages of last several years. Indeed, with total fossil fuel output last year having jumped by 10% Y/Y, and the lower energy intensity reduction target for 2023, we expect that the green transition within China may need higher growth rates in future years, while the country places economic recovery above environmental targets in the near-term. However, having said this, we forecast that robust spending from special local bonds this year will lean more towards green / renewable energy than traditional demand end sectors (i.e., the property sector). Therefore, we expect growth to remain resilient for our ‘green metals’.
BBG Word Count From the NDRC Work Reports 2023
Source: Bloomberg
China’s Domestic Output of Fossil Fuels
Source: Bloomberg
U.S. INTEREST RATE RISES - 50 VERSUS 25 BASIS POINTS RISE IN MARCH MEETING?
Aside from events within China, the U.S. has dominated headlines over the last week following Federal Reserve Chairman Jerome Powell’s testimony to Congress on 7th March, in which he opened the door for higher rates for longer, with the U.S. dollar strengthening to its highest level since November 2023.
Key Comments From Powell’s Testimony:
“the latest economic data has come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated”
“if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy”
“we have two or three more very important data releases to analyse before the time of the FOMC meeting”, “those are going to be very important in the assessment we have of this relatively recent data”
Looking ahead, given Powell’s confirmed attention on upcoming economic data releases, we forecast that market volatility is likely in the week ahead, with the correlation between copper and the U.S. dollar maintain a strong negative inverse corelation.
U.S. Dollar Versus LME 3M Copper
Source: Bloomberg
Key Data Releases Ahead of FOMC March Meeting
10th March: The release of NonFarm Payrolls at 13:30 GMT appeared to have swung the advantage in favour of the cautious over the more aggressive rate-watchers, with the markets nearing the end of the week with a more benign outlook that they started, over-riding Chair Powell’s testimony. However, burrowing into the numbers, though, suggests that the Fed will not be impressed and will remain more aggressive than the markets are discounting. A 50-point hike should not come as too much of a surprise.
10th March: The receivership of SVB pushed headlines over Nonfarm Payrolls to the side, with risk-aversion coming to the fore. However, the speed with which Regulators in the United States and beyond suggest that the fall-out from the SVB problems should be relatively limited. Anyway, the larger banks are well-capitalised and maintain prudent balance sheet management policies. U.S. Treasury Secretary Janet Yellen has said that she has “full confidence in banking regulators to take appropriate actions in response”. The lessons of 2018 were harsh, but have been learnt and led, inter alia, to the Dodd-Frank Act of 2010 that is fundamental in bolstering banks’ risk-resilience, notably with respect to capital adequacy and liquidity levels.
14th March: Headline M/M CPI is expected to pull back to 0.4% from 0.5% in January, with core CPI set to remain steady at 0.4% for a second month. However, BBG forecast that both headline and core CPI M/M will rise to 0.5% on the back of higher utility bills upon storms across California (with the Governor Gavin Newson declaring a state of emergency in 34 countries).
15th March: Factory-gate prices to be released for the United States, with a pull back forecast for the headline reading upon cooling energy prices, while the core reading could be sticker given demand in services.
2Y VERSUS 10Y U.S. GOVERNMENT YIELDS OVER LAST THREE DAYS
Source: Bloomberg
FED FUNDS FUTURES - 8th MARCH
Source: Bloomberg
FED FUNDS FUTURES - 13th MARCH
Source: Bloomberg
SVB Receivership – Background
Silicon Valley Bank went into receivership with the Federal Deposit Insurance Corporation (FDIC) on Friday 10th March following a run-on deposits as a number of tech start-ups, which were the primary focus of SVB’s operations, removed deposits after the bank had failed to sell a portfolio and needed to plug the ensuing hole in its balance sheet. Assets had been approximately $209Bn and this is being reported as the largest failure of an international bank since 2008.
SVB’s position shines a spotlight on potential systemic risks for parts of the banking system as cheap money disappears – that said, though, SVB is reported to have over-concentrated on one sector, and potentially over-lent likewise.
SVB had earlier in the week tried to sell a portfolio that partly comprised Treasuries, and which was offering a yield of less than 2%, against prevailing rates above 4%; this triggered a run-on deposits and arguably the subsequent bank failure.
The FDIC has said that insured depositors (up to $250,000) should have access to their funds by Monday morning, while uninsured depositors will have a receivership certificate although the amount that will be available is still uncertain.
Government leaders, not just in the United States, have been moving fast to constrain any contagion. The Bank of England, for example, put the UK SVB arm into insolvency on Friday.
OUR VIEW ON NEAR-TERM OUTLOOK FOR THE BASE METAL MARKET
While near-term indicators have turned more bearish for the base metal suite within China, upon weak trade data, building metal inventories and falling inflationary readings highlighting frail consumer demand, we will be paying close attention to activity data within China for signs of demand recovery in the coming months. Indeed, one chain of thought can be taken as ‘has the worst for China already happened?’, with ‘nowhere from here but up’. Indeed, BBG are forecasting a sharp increase in GDP growth over Q2 as consumer confidence builds post zero-tolerance, in addition to supportive monetary and fiscal policy. While in our view, economic readings may not have hit a bottom just yet, we are bullish for a recovery in H2, which will provide support under falling prices. However, the dominance of the U.S. dollar on the suite cannot be ignored and will act as a major headwind over the course of the year. In addition to this, we forecast the growing tensions between China and the United States as a significant downside risk to prices upon further escalation.
- Base Metals
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