Base Metal Commentary
By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
Snapshot Update – Chinese Trade Numbers Send Mixed Signals
On 7th August (Sunday), China released its latest trade figures for July, with both top line numbers and commodity specific figures providing a varied outlook for the health of demand. This comes on the back of a turbulent week, in which geopolitics took centre stage on the arrival of U.S. House Speaker Nancy Pelosi in Taiwan (as part of a tour of four Asian countries). As it stands, China has announced today (8th August), that fresh military drills will take place in the air and sea surrounding Taiwan (despite yesterday, 7th August, marking the end of the military exercise previously announced by China, in which eleven short-range ballistic missiles were tested, alongside the increased mobility of Chinese warships and fighter jets around the island).
LME 3M PRICE PERFORMANCE (W/W Change)
Source:Bloomberg
VIX
Source:Bloomberg
Chiense Trade Numbers – Not What the Market Expected
CHINESE TRADE
Source:Bloomberg
TABLE OF CHINESE TRADE – PREDICTED VERSUS ACTUAL
Source:Bloomberg
China’s trade surplus beat market expectations, jumping to $101.3Bn (from $97.9Bn), with exports outpacing imports to take the surplus to its highest level on record. Focusing on exports, the robust level of growth in July at 18% Y/Y (just down from 19.7% Y/Y in June), was a welcome surprise (with markets expecting a weaker print of 14% Y/Y), as tighter monetary policy and the ongoing war in Ukraine has weakened consumer sentiment and manufacturing activity. It appears as though a key sector of growth arose for automobile orders which jumped 65% Y/Y (based on a Goldman Sachs report), likely signalling an unwinding of pent-up demand on improving supply chains. Meanwhile, imports into China jumped by 2.3% Y/Y in July (up from 1% in June), although below the forecast of 4%, dampening optimism for a strong return of domestic demand and splitting the headline figures into both positive and negative drivers. On a regional basis, July export orders to the Association of Southeast Asian Nations, the EU and Russia jumped by 33.5%, 23.3% and 11.0% Y/Y respectively, while growth lowered on a M/M basis for India and the United States (to 52.0% and 22.2% Y/Y respectively).
CHINESE EXPORTS BY REGION/COUNTRY
Source:Bloomberg
TABLE OF IMPORTS & EXPORTS BY COMMODITY
Source:Bloomberg
Looking at the breakdown of trade figures by commodity:
There has been a clear downturn in demand for both copper ore and copper products, which is important to note, as in June (on a M/M basis), copper products were the only commodity (of focus here) that posted a lift in imports. This could be taken as a bearish signal for demand, given the ongoing disconnect between this data reading and the current elevation in the import premium
(which is hovering around its highest level since December 2021), alongside falling domestic stocks (please note SHFE on warrant stocks have declined by 40% since end-July).
COPPER IMPORT PREMIUM VERSUS SHFE ON WARRANT STOCKS
Source:Bloomberg
Meanwhile, despite iron ore, coal and crude oil imports all rebounding from June’s M/M contraction (jumping by 2.6% Y/Y, 23.9% Y/Y and 4.2% Y/Y respectively); imports for each of these commodities remain in negative territory on a YTD basis. Indeed, high international energy prices, ongoing COVID cases and the downbeat outlook for domestic construction (given the weakness in the property sector), have reduced outright demand this year.
CHINESE IMPORTS BY COMMODITY
Source:Bloomberg
Looking to exports by commodity, external steel demand appears to have reached a peak this year, with July marking a second month of pullbacks, which is in line with declining manufacturing PMI figures across Asia (ex-China), Europe and the United States last month (with Europe, Taiwan and South Korea in contractionary territory). Meanwhile, the significant disruptions to aluminium production in Europe (as a result of higher energy prices and lower metal prices), has resulted in China increasing its exports of the metal to the region, with exports in July (652,200t) at their second highest level on record (behind May at 676,600t).
CHINESE EXPORTS BY COMMODITY
Source:Bloomberg
Our View
We expect, moving forward, that exports will face pressure as consumer sentiment and spending are capped by rising interest rates and uncertainty over recessions. We forecast that the robust export growth in July was supported not only by pent-up demand from pre-existing orders (that have been delayed due to logistics issues), but from the improvement in supply chains (given no city-wide lockdowns in China and falling global freight rates). Please note, Reuters reported that the throughput at Shanghai’s port rose to its highest level on record in July). Meanwhile, the outlook for imports (and therefore domestic demand) remains unclear, although we do expect demand will be strongest from sectors such as automotive and infrastructure, given supportive Government policy (such as tax breaks and record levels of special Government bond issuances), while the construction sector is set to remain weak. Additionally, while further spreads of COVID-19 in the country remain a key threat to higher growth, so too does any escalation in tensions between the United States, China and Taiwan, with the developments last week likely to have pushed back progress over trade tariffs talks between President Biden and President Jinping.
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