Metals Daily (17-May-2021): China seeks to cool hot commodity markets

Metals Daily (17-May-2021): China seeks to cool hot commodity markets

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A concise summary of what’s moving markets, the impact on base, precious and ferrous markets, including Theme of the Day.

What’s moving markets?

  • Global stocks had the worst week last week since February after a choppy period in which a US inflation scare and fears of tighter central bank policy battled with bullish forecasts on the global economic recovery. On Wall St, the S&P 500 index suffered its biggest drop since February after reaching an all-time high a week ago. The University of Michigan’s monthly survey of consumer sentiment showed households expected inflation to hit 4.6% this year, up from 3.4% when they were questioned in April. Buying into dips remains the right strategy. Week-on-week, the yield on 10-year Treasuries rose 6bp to 1.64% and the USD index (DXY) was unchanged at 90.3.   
  • Although this week’s inflation numbers raises the theoretical prospect that interest rates should now rise sooner than expected, the Fed continues to downplay this possibility, with Fed Vice Chair Richard Clarida saying that it would be “some time” before the central bank considers scaling back its support. Fed Governor Christopher Waller was more explicit, saying that although he expects inflation to exceed the Fed’s 2% target for the next two years, he does not think that the Fed will raise rates until it either sees inflation above target for a long time, or excessively high inflation.
  • US retail sales, a measure of sales at stores, online and in restaurants, were flat in April from the previous month, the Commerce Department said. That followed an upwardly revised 10.7% increase in March, the second biggest jump on record behind the 18.3% increase in May 2020 and was worse than economists’ expectations for a 1% rise. Excluding autos, sales decreased 0.8% mom in April (consensus +1.2%). Supply-side shortages are having some impact on consumers being able to find certain items (like used cars) or alternatively, that spending on retail goods is now decreasing as outlays for services pick up instead.
  • Gold and palladium made gains; bargain hunting gave support on rising inflation expectations and recovering industrial demand, respectively. Platinum was steady above $1,200/oz as automakers in China and North America start to switch to platinum from more expensive palladium in autocatalysts, along with new uses such as hydrogen fuel cells.  
  • Risk reduction was the theme across the base metals complex as China tightens policy and Premier Li comments on the need to cap the commodity price surge. The metals have not had much of a correction to speak of, so we should now get an update on how bullish underlying sentiment really is, by seeing how far prices pull back and for how long.
  • Ferrous markets including iron ore and steel came off their highs in response to comments from Chinese authorities on the need to cap the commodities price surge and recent action by exchanges to address the speculative froth in many markets (see Theme of the Day).

Theme of the Day: China seeks to cool hot commodity markets

  • Authorities in China have sought to cool hot commodity markets, with Premier Li calling for stable prices. The rally in many industrial commodities came to a halt at the end of last week on concerns that China will crack down on speculative activity. Provincial government authorities are to examine illegal behaviour and suspend production at mills found to be manipulating market prices.
  • Chinese authorities are making a concerted effort to pressure ferrous prices lower and to some extent they seem to be succeeding. Regulators in Shanghai and Tangshan warned local steel companies against price gouging, collusion and spreading false market information. Shanghai regulators even put forth a stipulation that large steel price increases were forbidden unless there were significant changes in production costs. Futures exchanges such as Dalian and SHFE have responded with trading limits, higher margin on futures contracts, and increased transaction fees being imposed.
  • However, these measures have been slow to take effect as steel mills in the rest of the country have rushed to crank up output to take advantage of reduced capacity in Tangshan and cash in on record domestic steel prices. A decision to remove the export tax rebate for some steel products on 1 June has also led to other mills increasing production. As a result, China’s steel production hit a record level in March, with output up 19% YoY to 94Mt. Production was even higher in April, with exports up 20% YoY. That in turn boosted iron ore, which climbed 35% over the past month.
  • Major Chinese copper brokers and traders have been ordered to refrain from making bullish statements on metal prices by government officials in attempts to rein in the bullish sentiment of recent weeks. Conversations were held with a few traders on their copper market positions at individual meetings arranged by Chinese government officials overseeing commodity markets. Officials warned that remarks boosting positive sentiment in the copper markets could go against the spirit of recent public comments made by senior politicians. Premier Li had highlighted the negative impact of sharp increases in commodity prices on the operational costs of enterprises in China.

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