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By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
A Technical View
The base metal index broke above it medium-term (8 month) sidewards trending channel at the start of April, peaking at its highest level in six weeks by 18th April. However, gains were swiftly capped, with moving average indicators suggestive of further declines ahead (please note, the 50DMA crossed the 100DMA to the downside). With the Average Direction Index (ADX) posting a level well below 25 (currently at 12), the index appears lost for direction.
As it stands, the majority of key Chinese economic readings for the month of March have been released, and while there is no arguing that recovery is underway in the country (following the dropping of lockdown regulations for COVID-19 in January), there remains key headwinds, while it is apparent that supply recovery is outstripping that of demand within the base metal suite.
• Y/Y GDP in Q1 rose at its fastest pace in a year at 4.5%, with the YTD reading jumping from 2.5% to 4.5% over the period, with major banks such as Citigroup and Société General upgrading annual growth forecasts to over 6%. With solid growth over the first quarter of the year, and forecasts for peak growth in Q2, it appears as though the country will comfortably achieve its target growth of 5.5% for 2023.
• Headline trade readings surprised to the upside in March, with exports (that were forecast to record a six month of declines), rebounding into growth of 14.8% Y/Y, driven by increased demand from Russia and Southeast Asian nations, which offset weakness in the west. Meanwhile, imports posted only a modest decline in March Y/Y, beating market expectations of a more significant fall.
• Retail sales have significantly picked up over March, with growth at its highest level in 16 months.
• Industrial production rose to its highest level in three months in March, posting growth just below end-2022 levels.
Source: Bloomberg
• Credit growth surprised to the upside in March, with the PBoC continuing to take an accommodative stance.
• Despite, robust GDP growth and unemployment lowering (to 5.3%), the jobless rate among 16-24 years old in China has risen to a near record level, with unemployment as a whole still historically elevated.
• Base metal imports remain weak over the last month, with copper products down 12.6% on a YTD Y/Y basis, while M/M declines were posted for both copper products and copper ore. Meanwhile, an uptick in aluminium exports over March have not been able to offset annual weakness ex-China, with exports down 77.3% on a YTD basis.
• Investment within the property market remains in contractionary territory for an 11 month, with investment for fixed assets showing signs of deacceleration. We forecast that construction output will only modestly lift over 2022 levels in China.
• The rise within industrial output over the start of the year, appears to be reflecting the recovery in activity within domestic producers, over downstream players. This is evident when we compare YTD SHFE base metal stocks (which are holding onto double, if not triple digit gains), while domestic output for copper, lead and zinc hit record highs in March. In addition to this, with inflation growth slowing in Q1 (back to levels recorded in September 2021), this a further indication of weak physical demand for goods at present.
• Meanwhile, arguably one of the largest threats this year could arise from an escalation in tension between China and the U.S., with the opening months of this year displaying a deterioration in the relationship. Indeed, surrounding the annual Two Sessions meeting, China’s President, State Media and New Foreign Minister used debatably the most provocative language against the US in recent times, while President Xi’s trip to meet Russia’ President Vladimir Putin, made Xi the first world leader to see Putin after the International Criminal Court issues an arrest warrant for him. As it stands this week, headlines are surrounding a proposed new executive order bill from U.S. President Biden, that will seek to cap American investment in Chinese businesses that focus on semiconductors, artificial intelligence, and quantum computing, with the bill set to be signed and launched during the G7 meeting in May.
We forecast that GDP growth within China will peak in Q2, however, the path of recovery within activity in the country will play out with domestic supply outstripping that of domestic demand for some time to come, placing caps on price gains, despite ongoing supply side issues in certain provinces. Meanwhile, exports are unlikely to hold up against weakening demand in the west, removing a major pillar of economic growth for the country. Furthermore, although there are signs of life within the property sector, which are suggestive that we may have hit the bottom, restoring confidence will be a lengthy process, with significant improvements unlikely to be reached until next year. Finally, the escalation in tensions between China and the United States could act as a major headwind for global trade and growth and it remains one of the largest risks to our forecasts to the downside.
On the Marco Front
• Markets appear to be in a wait-and-see mode ahead of the next U.S. FOMC meeting at the start (2-3rd) of May, which is limiting a strong move for the base metals in either direction, despite the marker strongly pricing in a 25-basis point rise. In addition to this, a flurry of data for April we be highly tracked covering inflation expectations, Federal Reserve activity index, and Q1 GDP growth.
• Headlines will be closely watched for updates on Chinese and U.S. relations, although there will be very little data out regarding economic readings for China itself over the next week, aside from industrial profits in March, which are set remain in contractionary territory for a ninth month.
Industry Stories
• We forecast that industrial stories will take centre stage over the next several weeks (ahead of the FOMC meeting), where concerns are building over South American copper supply, and smelting output for high-energy intensive metal like aluminium and zinc that face bottlenecks either in the form of power rationing (in China), or unprofitable margins (in Europe).
To read more about copper mining in South America, please see our weekly macro update here.
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