Metals Daily (25-May-2021): Might this time be different?

Metals Daily (25-May-2021): Might this time be different?

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Source: Bloomberg

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 equities were higher, as investors focused on prospects of a robust economic recovery. Bond yields and the USD lost ground.
  • Bitcoin rebounded by 10% to around $38,000 after last week’s heavy falls and remains vulnerable to further negative news.
  • China means business with more weekend meetings attended by various agencies and especially the NDRC which states it will “severely punish” anyone in our markets for “spreading of fake information, price speculation and hoarding”.  A government commission said there would “zero tolerance” for “excessive speculation” and hoarding which it said contributed to the recent rally. Key Chinese commodities companies have been warned that they would be investigated thoroughly if they were suspected of engaging in any illegal trading activities and punished severely if found guilty.
  • Chinese state media reported on Monday that authorities would closely examine movements in the “spot” commodities market, where goods are available for immediate delivery and the futures market. Xinhua reported that regulators would “adopt a zero-tolerance attitude on irregularities”. The Chinese government held a meeting with the biggest iron ore, steel, copper, and aluminium producers on 23 May to call for them to rein in commodity price hikes. Commodity leaders were told at the meeting to “proactively fulfill their social responsibilities” and make business decisions “for the benefit of the entire economy as a whole.”
  • The warning comes amid increasing signs that Chinese commodity demand may be peaking as the PBoC gradually restricts the flow of money to the economy and funding for infrastructure projects slows. Is this bearish for metals prices (see Theme of the Day)?
  • The weaker USD and lower yields lifted the precious metals complex, with gold holding near their recent highs. Palladium remained under pressure from long liquidation and chart-based selling, but strong fundamentals argue for a bottom to be found around current lows.
  • Base metals rebounded on some bargain hunting and short covering after last week’s slump, with copper and aluminium showing the way higher, although the others remained under pressure. The Chinese government said it would crackdown on high commodity prices, punish monopolies, the spread of false information and price speculation.   
  • Iron ore fell sharply and below $200/t after China signalled it would focus on efforts to cool soaring prices, warning of excessive speculation, hoarding and manipulation, as concerns grow over rising inflation. Prices have fallen some 20% from its record high less than two weeks ago. Steel prices were also lower, with rebar and HRC both sliding by 4%.

Theme of the Day: Might this time be different?

  • China’s social or aggregate financing surprised on the downside, falling to RMB1.85tn ($287bn) in April from RMB3.34tn in March. New loans were down YoY for the second consecutive month while overall credit growth (stock) slowed to 11.7% YoY. The credit impulse is set to turn negative next month. According to Bloomberg, China’s economic expansion and credit impulse may have already peaked, and metals prices will follow with a lag. Some prices still have to room to rise due to lagging effects as we saw in the 2015-17 period. However, reduced investment in infrastructure suggests demand growth for industrial commodities, especially metals, will be lower. Might this time be different?
  • Global supply and demand for industrial metals points to a bullish outlook and is no longer China-centric. It’s not all about China as the rest of the world is growing again. China’s growth is slowing due to an ageing population, high debt load, lower productivity and increasing international tensions will keep growth below the levels of the past 15 years. China is in its late industrialisation-urbanisation phase and, as highlighted in its 14th five-year plan, the long-term focus will shift from fixed assets investments into high tech, artificial intelligence, and green initiatives with a lower metals intensity per unit of GDP.  
  • On a more positive note, any weakness in China could be mitigated by stronger growth in the US and Europe as “green” stimulus spending gets underway. In the previous price cycle, China drove the commodity markets because it was providing greater than 100% of the demand growth. In the current environment we’re likely to see a much more coordinated, global impact on demand, which makes this cycle stronger. Metals demand over the next decade will benefit as the greening of the global economy boosts demand and supply struggles to keep up.
  • The energy transition will transform demand for copper and other key metals, exposing a lack of supply by mid-decade. Metals prices need to rise further to encourage enough new supply to meet projected demand from the global green revolution and to meet many governments’ goals of reaching net zero carbon emissions by the middle of this century, yet most of the world’s easy deposits had already been mined. Higher prices are required to encourage a lot of this more difficult investment, with new projects often in riskier areas including Russia and parts of Africa. Will higher metals prices see increased demand met by a combination of increased recycling and/or primary supply, and is enough attention being paid to the risk of substitution associated with higher prices?

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