By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
With only a few weeks left of the year, the base metal suite is unlikely to return to its H2 high (on 8th December), as a softening in the macro picture (from a weakening dollar and move away from zero-tolerance stance on COVID-19 in China), has been partially postponed by the reality of rising virus cases in the latter country (and the potential impact it will have on a recovery timeline). Meanwhile, expectations for central banks (in developed countries) to hold onto higher for longer interest rates (following comments from Federal Reserve Chair Jerome Powell after the December FOMC meeting and ECB economic projections for forecast higher than expected inflation in 2023), has resulted in the U.S. dollar modestly appreciating over the last week (after falling on 14th December to its weakest level since June). Taking this into account, we have lowered our price forecasts since the start of Q4, with uncertainty likely to shift into the start of 2023, led predominantly by China. Having said that, the base metals are on track to record their first Q/Q price gain (in Q4) since Q1 2022 (when supply concerns surrounding potential sanctions on Russia resulted in copper, aluminium, tin and nickel posting on-record highs).
BASE METAL QUARTERLY PRICE PERFORMANCE – ON TRACK FOR A RECOVERY IN Q4
A WEAKENING U.S. DOLLAR HAS BEEN SUPPORTIVE FOR BASE METAL PRICES
So Where Are We with China?
It appears market sentiment is mixed when it comes to the outlook for China, with weak underlying economic readings and rising cases of COVID-19 in the country, fighting against the prospect of accommodative monetary policy, targeted fiscal actions, and a desire to boost domestic consumption in 2023. Below we highlight the key outcomes of the recent Central Economic Work Conference (which is known as a pre-cursor to the Two Sessions meetings in 2023 - in which economic targets are set for the year), and the impact to the base metal suite.
China’s Central Economic Work Conference
On 15th-16th December, China’s Central Economic Work Conference took place (despite news headlines reporting that the meeting would be delayed due to rising COVID-19 cases in the country), with the outcome providing the first clues to what we can expect for economic policy in 2023. Please note however, the outcome of the meeting (as expected) failed to provide any specific numerical targets (such as goal GDP growth), but it did allude to key areas that will be in focus next year.
The Word of 2023 to be ‘Growth’ – With Expectations for a GDP Target Around 4.5%-5.5%
It appears based on comments from China’s top leaders that the term of 2023 will likely be (domestic) ‘growth’, which is a move away from the term ‘stability’, which was heavily mentioned this year. Market expectations for a pro-growth stance by China (in both consumer spending and employment growth) has seen forecasts for target GDP to average ~5% for next year, which would be a markable shift up from the forecast for 2022 (of ~3%).
CHINESE GDP
Other Key Areas Touched Upon
• Fiscal policy to be “more forceful”, moving from boosting investment to driving consumption, including targeting areas of green development, technology innovation and small firms. It is expected that we will record an increase in transfer payments by central Government to local regions (helping to maintain local Government debt at sustainable levels). However, please note, Chinese officials have avoiding using terms like “front-loading” infrastructure and “new tax cuts”, which may indicate that fiscal stimulus will be pulled back from this year’s levels.
• Monetary policy to be “more targeted and forceful”, while maintaining liquidity at reasonably ample levels. We forecast that further interest rate cuts may take place, in addition to support being given to small businesses (which have been hit the hardest this year). Please note, following comments from the Deputy Governor of the PBoC Liu Guoqiang, where he said the “magnitude of monetary policy will not be smaller than this year”, that monetary policy will remain accommodative.
• The private sector is in focus, with platforms to be supported in order to create jobs and allow competition in international markets (please note this marks a shift away from the term of ‘supervision’ mentioned this year). “We will encourage and support the growth of private economy and private enterprises both with policy and in terms of social consensus”. “Officials at all levels should concretely help private companies deal with difficulties”.
• The hard line of “housing is for living in, not for speculation” remains at the centre of policy towards the property sector, with Chinese leaders highlighting that the focus for growth (in the economy) should be less reliant on property; however, efforts will be taken to support consumer demand for “better housing” and support the “reasonable” financial needs of property companies. Please note, it was also mentioned that China wishes to reduce the financial risks of some the of the largest developers, while a change to the business model of the property sector could take place.
CHINESE KEY ECONOMIC READINGS FOR NOVEMBER
Our View: Riding the Wave of COVID-19 - Short Term Pain for Long-Term Gain?
In our view, despite the latest announcements coming from the Central Economic Work Conference, promising to support domestic consumption and lift GDP back to levels more ‘comfortably’ associated with historical growth in the country, there remains little evidence at present to support near-term recovery. Indeed, in the release of November’s economic figures (almost across the board), readings came in below market expectations, with PMIs (both state-produced and Caixin) remaining below the all important 50 level (so still in contractionary territory), while trade figures highlighted demand weakness both domestically and abroad, in addition to a property market that isn’t showing signs of bottoming out. If we combine this with expectations that the spread of COVID-19 is likely to remain a key headwind in the near-term (zero-tolerance having been eased), then we continue to forecast the timeline for a recovery to stretch into Q2 2023 at least.
What is the Impact on Our Metals?
Placing the impact of U.S. dollar movements (on base metals) aside, we expect the suite to take its ques from the outlook for demand destruction till year-end (side-lining the low global stock environment), with uncertainty over the timeline for a recovery in China remaining a key topic at the start of 2023.
BASE METAL ANNUAL AVERAGES
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