Base metals prices retreated from their January highs as Chinese economic woes threatened the demand from the world’s largest commodity consumer. Fears of excess supplies and the US Fed’s rate hike policies also added pressure on prices throughout the period.
In the benchmark LME platform, prices of the most used industrial commodities like copper and aluminium shed by more than 37% and 17%, respectively since their January highs. Meanwhile, zinc prices lost 27% while lead prices were almost unchanged. A similar move was witnessed in the domestic MCX futures, but losses were slightly limited due to weak domestic currency.
China is the world’s largest consumer of base metals. The construction industry in the country is the largest consumer of copper, aluminium, and zinc, while the manufacturing industry uses significant amounts of nickel and lead. However, signs of deteriorating economic activity and credit flows in the country are casting shadows on the demand prospects of the metal complex.
Since the start of the second half of the year, China’s economic releases missed expectations as the economy continues to show uneven recovery. This has raised worries that the world’s most metal-consuming country will slide into deflation. China’s growth target for the year is 5% which is the lowest in decades.
The producer price index, which is heavily driven by the cost of commodities and raw materials, fell for a tenth consecutive month in July. Likewise, the consumer price index also dropped in recent months.
The crisis in the property market, weak exports, and a falling yuan are the key reasons affecting the market sentiments.
China’s property sector, the prime driver for metal demand from the country, has been under crisis as property prices declined.China’s policymakers have taken stimulus measures like cutting rates and adding liquidity to the financial system to step up the economy. Initiating stimulus has shown some improvement in the economy but challenges in the key property sector are still intact.
In the meantime, supply growth is outstripping demand growth for most of the base metals. Earlier, many of the smelters halted operation due to high energy prices. Now, cooling energy prices and easing supply bottlenecks prompted smelters to restart the production. Additional capacity is expected to come online from various countries, boosting the supply outlook.
However, interestingly, inventory levels of various base metals at exchange warehouses are still running at extremely low levels.
A dim outlook for the global economy due to aggressive rate hikes of the US Federal Reserve and the repercussions of Russia’s invasion of Ukraine also moderated the demand outlook.
Going ahead, as the traditional demand drivers of industrial metals have stalled, the short-term price outlook remains under pressure. Though the new demand areas like the clean energy sector are on the cards, they are unlikely to boost prices in the immediate run.
China’s weakening economy is now the biggest threat to the global base metal market. Structural changes in their economy would lift demand and consumption. There are also hopes for more stimulus measures from China’s central bank in the coming months, which may ramp up the economy and regain growth.
Likewise, the US Federal Reserve’s decision to hit a pause on its interest rate hikes may boost the global economic outlook and increase the demand for industrial commodities.
(The author is Head of Commodities at Geojit Financial Services)