Base Metal Commentary
By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
THE RELEASE OF CHINESE TRADE DATA LEAVES THE BASE METAL MARKET LUKEWARM, WITH THE ROAD TO RECOVERY REMAINING UNCERTAIN
The base metal suite is currently walking a thin tightrope between renewed optimism over the beginning of a recovery in China, versus an uncertain outlook for the wider economy, given growing inflation concerns and a backdrop of tightening monetary policy, not to mention the ongoing uncertainty over the Russia/Ukraine war. This week, a flurry of economic data out of China (including aggregate financing, CPI and PPI) will be pivotal for price direction for the metals, particularly given the backdrop of easing lockdown measures in the country. In today’s commentary, we will give a snapshot update of the latest release of trade data out of China, and what its implications are for the future of demand.
SNAPSHOT OF CHINA’S LATEST EASING MEASURES
Beijing
• Outbreak deemed under control; certain restrictions lifted
• PCR test to be taken within 72 hours to enter public spaces or take public transport
• Dine-in restaurant services will resume on 6th June (except in the Fengtai district and some of Changping district)
• Return to work will resume on 6th June
• Traffic bans lifted as of 6th June, alongside public transport in most areas
• Shopping centres outside controlled area to open with limits
Shanghai
• Raft of new measures to support economy
- COVID-19 test requirements reduced to enter public places on 1st June
- All manufacturing restarted on 2nd June
- Accelerate approvals for property projects
- Car ownership quota (i.e. number of residents able to purchase a car in Shanghai) set to move to 40,000
- Purchase tax for passenger vehicles to be reduced (+ subsidies for EV)
• A ‘mini-lockdown’ in the south-west district of Shanghai known as Minhang will go into effect from 11th June where mass testing will take place.
Please note, trucking traffic could return to normal level in 1-2 weeks (based on Flexport Inc), while Dimerco Express Corporation said trucking activity was back at 80% of pre-lockdown levels by end-May. In addition, daily cargo throughput (a measure of cargo handled) has returned to 95% of normal levels (based on local reports), while VesselsValue cited that freight waiting times off Shanghai had fallen to 31 hours (1st June), versus 69 in late April.
CHINESE TRADE FIGURES
Source:Bloomberg
Top Line Numbers
• Total Chinese exports jumped 16.9% Y/Y (in USD terms), coming in above April’s reading of +3.9% and above that of market forecasts of +8%.
Our View:
While this jump in exports will, in the near-term, be taken as a further positive sign that China is on a track to recovery (given that exports stand as one of the key drivers behind economic growth – please note Nomura Holdings estimated that exports contributed to up to 20% and 33% of growth over 2020 and 2021 respectively), it may be too early to tell if this higher level can be sustained. Indeed, not only will China have to battle against inflationary pressures denting demand, but as western economies continue to emerge from lockdowns, consumption trends are moving away from goods and back to services. If we look to forecasts in the market, it is expected that the 30% jump in total exports recorded last year is unlikely to be matched this year, with Nomura Holdings citing a jump of just 1.6%. Given the current backdrop of a slumping property market (which contributes to 25% of GDP), in addition to the threat of further COVID-19 lockdowns not off the table, China’s reliance on a healthy export market is critical.
• Total Chinese imports lifted by 4.1% in May, coming in above market expectations after remaining unchanged last month.
Our View:
Despite import figures improving in May, when looking at the breakdown of raw materials, the picture was mixed and it is still too early to call if raised imports are a result of China stocking up ahead of anticipated higher demand in H2, or if discounted pricing (i.e. for crude from Russia) played a larger part.
CHINESE TRADE – KEY COMMODITY BREAKDOWN
Source:Bloomberg
CHINESE TRADE IMPORTS BY COMMODITY
Source:Bloomberg
Import Breakdown
• Unwrought copper
Imports came in lower on a M/M basis at 0.5Mt, with total YTD imports at a similar level to last year, up by 1.5%.
• Copper Ores/Concentrates
Imports surged to a record of 2.2Mt, driven by the return of domestic smelting capacity, which is set ramp up over the year as lockdowns lift. Please note, this has the potential to act as a headwind for copper prices over H2 and alter the rhetoric of supply concerns from social unrest, low grades and water supply issues arising in South America.
• Coal
Imports fell to their lowest level since March at 20.6Mt, resulting in a decline of 13.8% on a YTD basis. Warmer weather, high prices and a slowing economic performance in China are the key drivers behind the falling level of imports, we will have to wait to see if a pickup in industrial activity will result in a higher resumption in H2.
• Iron Ore
Imports rose to their highest level since January 2022, marking a 7.5% M/M jump and 3.0% Y/Y lift, although they remain down by 5.3% on a YTD basis. Looking ahead, we forecast that imports will benefit from ongoing Government support in pledging infrastructure stimulus.
• Crude Oil
Crude oil imports similarly jumped to their highest levels since January 2022, resulting in 6.5% M/M lift and 11.9% Y/Y jump, although they remain down by 1.7% on a YTD basis. This dramatic rise in imports is likely a result of steep price discounts from countries such as Russia, Iran and Venezuela; however, we should be cautious not to discount China re-stocking ahead of anticipated higher demand.
CHINESE EXPORTS BY COUNTRY
Source:Bloomberg
CHINESE EXPORTS BY COMMODITY
Source:Bloomberg
Export Breakdown
• Aluminium
Aluminium exports jumped to a new record level in May to 677,000t, displaying the growing regional split in production levels between China and the ROW (particularly Europe upon higher natural gas prices). Given China’s expanding aluminium capacity (which is set to reach 2.5-3.0Mt this year), in addition to no energy intensity target being set for 2022, robust aluminium exports are likely to be maintained over much of this year, although may pull back in light of higher domestic demand.
Aluminium exports jumped to a new record level in May to 677,000t, displaying the growing regional split in production levels between China and the ROW (particularly Europe upon higher natural gas prices). Given China’s expanding aluminium capacity (which is set to reach 2.5-3.0Mt this year), in addition to no energy intensity target being set for 2022, robust aluminium exports are likely to be maintained over much of this year, although may pull back in light of higher domestic demand.
• Steel
Steel exports lifted for a third consecutive month, to reach their highest level since April 2021, after high prices and logistic disruptions hurt ROW production.
GLOBAL FREIGHT RATES ARE STARTING TO IMPROVE BUT REMAIN ELEVATED ON A HISTORICAL BASIS
Source:Bloomberg
RAW MATERIAL PRICE INDEX
Source:Bloomberg
WHAT TO WATCH THIS WEEK
CHINA
09.06.2022 Aggregate Financing, New Yuan Loans, Money Supply (M0, M1 & M2)
10.06.2022 PPI Y/Y
10.06.2022 CPI Y/Y
UNITED STATES
10.06.2022 CPI M/M, Y/Y, CPI Index
10.06.2022 Real Average Hourly/Weekly Earning Y/Y
10.06.2022 University of Michigan Sentiment, Current Conditions, Expectations, 1Y & 5-10Y Inflation Expectations
EUROPE
09.06.2022 ECB Main Refinancing Rate, Marginal Lending Facility, Deposit Facility Rate
- Base Metals
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