By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
CHINA STEPS UP ITS ACTIONS TO LIMIT COMMODITY PRICE GAINS
On Sunday 23rd May, five departments including the National Development and Reform Commission, the Ministry of Industry and Information Technology, the State-owned Assets Supervision and Administration Commission, the State Administration for Market Supervision, and the China Securities Regulatory Commission held a meeting to address the significant YTD price rises for commodities, with a focus on iron ore, steel, copper and aluminium. In the meeting it was pointed out that key drivers behind these gains came not only from international transmission factors, but also have likely been a result of excessive speculation. As a result, improved order in the market was requested to avoid market manipulations, with the relevant regulatory authorities set to closely follow the trend of commodity prices, strengthen the joint supervision of commodity futures and the spot market where “zero tolerance” for illegal activities will take place. Indeed, participating companies (which includes the Non-Ferrous Metals Association), stated that it will standardise production and operation behaviours, adhere to legal compliance operations and make positive contributions to creating a harmonious and stable market and price order.
LME BASE METAL PRICES YTD
Source: Bloomberg
LME VERSUS SHFE YTD PRICE PERFORMANCE
Source: Bloomberg
As a result, this morning we have seen the commodity basket pull down, with base metal prices across the suite declining on the LME and SHFE. However, this is not the first time this year we have heard from the Chinese Government regarding the prospect of cooling commodities prices. Indeed, over the last two weeks, more stringent limits for trading iron ore and steel products were put in place both on the Dalian exchange and SHFE. While it was rumoured that up to 800,000t of aluminium was injected into the domestic market (by the State Reserve) in the second half of March, in order to limit price gains caused by the prospect of reduced production, following tighter emission curbs. Indeed, while previous attempts to cool base metal prices have been largely unsuccessful, with the rhetoric of the green transition (to reach peak emissions by 2030 and carbon neutrality by 2060) having been a key driving force behind higher prices, now with tighter trading limits in place across the suite, we may see how much of these price gains have been driven by positive sentiment, overinflating prices, rather than underlying fundamentals.
CHINESE BASE METAL OUTPUT NOT YET IMPACTED BY TIGHTER EMISSION REFORMS
Meanwhile, a good example to highlight the fundamentals (in the case of aluminium) comes here. Indeed, last Monday
(17th May), data for Chinese refined aluminium output for April was released, which demonstrated a 12.6% Y/Y rise to 3.35Mt. If we annualise this figure, it equates to 40.7Mt, which would mark the highest level of production in China on record, wiping out the argument (for the moment) of the impact of reduced production in Inner Mongolia (based on emission curbs) earlier in the year.
CHINA ECONOMIC PERFORMANCE PEAKED IN Q1?
CHINA ECONOMIC INDICATORS (January-April)
Source: Bloomberg
CHINA ECONOMIC INDICATORS (January-April)
Source: Bloomberg
Last week we had the release of April numbers for industrial production (IP), fixed-asset investment (FAI), property investment and retail sales in China, and what we recorded is that on a YTD basis, each reading (with the exception of property investment), came in below market expectations. Indeed, focusing on IP (on a Y/Y basis, removing base effects), growth held steady with March’s level at 6.8% (with the production of medicine, metals products and general purpose equipment being the key drivers, particularly for export, although automotive production growth slowed). Meanwhile, growth in FAI broadly maintained momentum, with growth in private investment outpacing that of public investment on a YTD basis. However, the area of weakness came from the recovery in retail sales, where the average growth rate fell to 4.3% from 6.3% in March. Overall therefore, the goal that the country’s Politburo set out at the end of April, to increase supply side reform and drive a rebound in the domestic demand, will continue to stay at the heart of the economy’s recovery, while we expect that economic growth has likely peaked in Q1.
CHINA POTENTIAL ACTIONS TO TARGET RISING COMMODITIY PRICES
· Injection of State Reserve Inventory
· Tightening of Speculative Trading Activities
· Monetary or Fiscal Pull Back
Furthermore, while we will have to wait see what the impact of tighter trading limits will play on the base metal market; if prices fail to cool, the Government could use an option in which they increase the pace of the pull back of monetary or fiscal stimulus, although we do believe this would be a last resort and indeed against what the PBoC has publicly announced (of prioritising stability in monetary policy in 2021).
BLOOMBERG COMMODITY INDEX VERSUS CHINA CREDIT IMPULSE
Source: Bloomberg
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