Base Metal Commentary
By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
THE BASE METAL SUITE HAS SHOWN SOME RECENT PRICE STABALISATION – BUT FOR HOW LONG?
The base metals appear to have shown some price stabilisation over the last two weeks (following a significant selloff over the prior month), driven in part by a modest easing in lockdown measures within Shanghai (and no further deterioration in Beijing), while the U.S. dollar retreated from its recent bull run. However, in the near-term, with major macroeconomic parameters highlighting the negative impact on demand from inflation, Russia’s invasion into Ukraine and China’s continued zero-tolerance measures against COVID-19, this could just be a dead cat bounce, rather than signs that prices are bottoming out. This week, alongside the release of global PMI readings (which displayed the ongoing pain the manufacturing industry is facing as a consequence of stretched supply chains and high raw material prices); China is in focus, following an eventful seven days of various policy announcements, which battled against the release of further disappointing economic data in the country.
LME 3M WEEKLY BASE METAL PRICE PERFORMANCE
Source: Bloomberg
LME 3M COPPER VERSUS THE U.S. DOLLAR
Source: Bloomberg
GLOBAL PMI READINGS
Source: Bloomberg
China in Focus
Over the last week, a flurry of policy announcements and meetings held by Chinese authorities has outlined the increasing levels of concern the country is facing over economic growth. Indeed, yesterday (26th May) Premier Li Keqiang announced (in an emergency meeting with local officials), that more must be done to prevent a Q2 GDP slowdown after stating that “economic indicators in China” had “fallen significantly” and are “to a certain extent”, “greater than where the epidemic hit us severely in 2020”.
Key Chinese Economic Releases Over the Last Month
INDUSTRIAL PRODUCTION & PROFITS CONTINUE TO SLIDE
Source: Bloomberg
• Industrial profits in May displayed their worst performance since April 2020, with growth over the first four months coming in at 3.5% against 8.5% rise over Q1.
• Industrial production unexpectedly declined in April to 2.9%, marking the largest monthly fall since 1990.
CHINESE UNEMPLOYMENT ALMOST AT LEVELS SEEN IN 2020 PEAK
Source: Bloomberg
THE PROPERTY SECTOR REMAINS IN THE RED
Source: Bloomberg
Despite lockdown measures (as a whole) starting to ease within China, showing some signs that the peak of supply chain issues may be behind us, the negative impact on the economy could be longer lasting. Indeed, if we look at latest release from the Ministry of Transport (on 26th May), cargo throughput at major Chinese ports between 1st-24th May rose by 4.2% M/M, although down by 0.7% Y/Y. Meanwhile, a measure of cargo handling activity at the Shanghai port itself had rebounded to 95.3% of its normal level. Where issues persist however, is within domestic logistics, with a shortage of trucking vehicles and drivers. If we look at road freight traffic indexes for Shanghai (in the first three weeks of May), they were down by 81% on a Y/Y basis (please note this figure compares to an 84% drop Y/Y over the month of April). Given that Shanghai lockdowns are set to remain over the month of June, we anticipate that supply chain dislocations will be felt for months to come.
What Actions Have Chinese Authorities Taken Over the Last Week?
TIME OF POLICY ACTIONS OVER THE LAST SEVEN DAYS
- 20th May: PBoC cut the 5-Yr LPR to 4.45% from 4.6% (please note this is often used as a reference rate for moorages)
- 23rd May: China’s State Council introduced 33 new measures to boost spending for businesses and consumers
- 23rd May: PBoC and the Banking Regulator asked financial institutions to boost lending to the economy
- 26th May: Premier Li Keqiang holds an emergency meeting with thousands of local officials to warn of the dire consequences if more decisive action is not taken to prevent the economy slowing down (particularly over Q2).
Based on reports from Securities Daily, the outcome of the recent meeting held by Premier Keqiang will result in China accelerating its issuance of special bonds by local governments in order to boost infrastructure, with reportedly 1.82Tr yuan having been issued YTD (26th May). Indeed, based on local Government reports, up to 2.03Tr yuan may be issued by end-May. In addition to this, Securities Times reported that several Chinese banks are already holding their own internal meeting with the purpose of laying out plans to expand credit, with small to medium sized enterprises a focus point.
KEY CHINESE RATES
Source: Bloomberg
YUAN CONTINUES TO WEAKEN
Source: Bloomberg
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