Base Metal Commentary
By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
Global PMI Figures Illustrate Concerns of Slowing Physical Demand – Q3 a Critical Window for China
Over the weekend and today (1st August), the release of a flurry of data covering the health of global manufacturing and physical demand has dampened the outlook for the base metals, with a downturn in Chinese activity catching the market off-guard. In today’s commentary, we cover a snapshot of the latest figures released.
LME BASE METAL 3M INDEX
Source:Bloomberg
A GLOBAL DOWNTURN IN MANUFACTURING PMI READINGS IN JULY
Source:Bloomberg
TABLE OF GLOBAL PMI MANUFACTURING FIGURES
Source:Bloomberg
China’s Recovery at a Critical Period
Given the outlook for slower Ex-China growth as a result of tightening monetary policy (on worryingly high inflation) and uncertainty over the Russia/Ukraine war (and its implications for the energy sector), market players have been looking to China for any signs of recovery and pick up in physical demand, following the easing of city-wide lockdowns and boost to infrastructure stimulus. However, the release of weaker than expected PMI data and contracting property sales in July have only added to fears over the timing of a recovery, resulting in the base metal suite capping gains made over the previous two-week period.
PMI Figures Disappoint Across the Board
Both the state-produced and independently-produced Caixin PMI readings for manufacturing came in below market expectations, reversing gains over June, with the state-produced reading falling into contractionary territory. Breaking the figures down, both new orders and new export orders (which reflect domestic and external demand respectively) were in the red, showing weakness in overall demand in July. Indeed, the falls were broad based, with readings for small, medium and large corporations all declining (and remaining below 50). While arguably one positive to be taken from the latest figures arises from the modest drop in the time of delivery for supplies (which showed the first month of decline since April), this figure is coming off a six-year high, while the stocks of finished goods fell for a third month. It appears as though the unpredictable nature of COVID-19 spreads (which have most recently caused at least 100 of Shenzhen’s top companies to move to closed-loop operating systems), still remains a key negative headwind for China.
Coming to the readings for non-manufacturing PMIs (which cover both services and construction), while we await the Caixin reading (due on 3rd August), the state-produced figure similarly disappointed, coming in below market expectations, reflecting weakness in consumer confidence. However, within the sub-readings, the figure for construction lifted for a second month to its highest level since August 2021, although it appears that this positive reading was overridden by the release of property sales figures in July (from China’s Real Estate Information Corporation, which covers China’s top 100 developers), which contracted by 39.7% Y/Y, marking a 28.6% M/M decline (although this is an improvement from the 43% M/M fall over June).
TABLE OF CHINESE PMI READINGS (Market Expectations)
Source:Bloomberg
CHINESE PMI READINGS
Source:Bloomberg
NDRC Lays Out Steps to Support Economic Stabilisation and Recovery – Infrastructure Remains at the Forefront
On 27th July, China’s National Development and Reform Commission (NDRC) held the first meeting of its kind to lay out steps required for a ‘Coordination Mechanism for Important Projects to Promote Effective Investment’. In the meeting, it was highlighted that the third quarter was a crucial period and a critical window for China to stabilise growth and recover, where the acceleration of construction for large projects would be a “major deployment that benefits both the current and the long-term”. The meeting requested that member units of the coordination mechanism should:
1. Choose the right project. “Better play the role of "four liang", bring more investment, attract more social investment, and create more physical workload. Priority should be given to supporting projects in key areas of infrastructure, supporting planned projects, and supporting projects with mature preliminary work”.
2. “Invest funds as soon as possible. Adhere to the principle of "funds and elements follow the project” and invest funds in eligible projects as soon as possible. “We should promptly seek commercial banks to issue supporting loans for projects, focus on solving problems such as element guarantees, approval processing, etc., and do a good job in the preliminary work of projects and elements such as land, energy use, and environmental impact assessment”.
3. Speed up construction. “Seize the time window of the construction peak season in the third quarter, improve work efficiency, and form a physical workload as soon as possible. During the implementation of the project, those who meet the requirements will help the local people to work nearby as much as possible through cash-for-work, and at the same time strictly regulate the project management”.
The Outcome of the July Politburo Meeting Suggests a Softening in China’s GDP Target
On 28th July, President Jinping presided over the Political Bureau of the CPC Central Committee meeting, which analyses the current economic situation and aims to arrange what economic work needs to take place in order to meet targets. Given the lack of any new economic goals and a change in wording from April (please see table below), the outcome of the meeting suggests that the approach to hitting the 5.5% GDP target in 2022 may have softened; meanwhile a focus on existing policies has been highlighted (over additional stimulus).
TABLE COMPARING KEY WORDING (BY SECTOR) FROM THE APRIL POLITBURO MEETING
Source:Bloomberg
Our View
The outlook for a Chinese recovery remains uncertain given the latest data releases; however, expectations that China will miss its 5.5% GDP target have strengthened, with the key pillars of growth within the economy, from the property sector, exports and domestic demand continuing to perform poorly. As we have mentioned before, we believe the increased move from the Government towards mass testing centres will help avoid any city-wide lockdowns, although the unpredictable nature of COVID-19 spreads and the commitment to zero-tolerance means we cannot rule out disruptions over the remainder of the year. The release of trade data on 8th August will be pivotal to accessing the health of external demand, which rose above expectations in June, although we forecast that it has peaked for the year.
TABLE OF MARKET EXPECTATIONS FOR CHINESE TRADE IN JULY
Source:Bloomberg
TABLE OF EUROPEAN PMI FIGURES
Source:Bloomberg
• The final reading for eurozone PMI manufacturing came in above market expectations at 49.8 (from the initial reading of 49.6), although this marks the first time we have seen the reading fall into contractionary territory since June 2020.
U.S PMI & ISM READINGS
Source:Bloomberg
• The latest U.S. numbers show a downbeat picture, with PMI and ISM reading for manufacturing falling from June, while new orders slip (which may be an indicator of weakening future demand). Meanwhile, prices paid continues to retreat, which should support downstream industries. Employment levels beat market expectations in July, although remain below 50.
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