China’s growing demand for metals stokes prices

Prices of metals including aluminium, copper, zinc and nickel are on fire. Copper is trading at a two-and-half year high at around $7,200/tonne in LME.

The rally in metals is being stoked by strong demand from China. Inventories in copper in Shanghai Futures Exchange (SHFE) dropped 18 per cent on Friday over the previous week. In the month ending November 20, copper inventories were down a sharp 38 per cent (58,740 tonnes). In aluminium and nickel too, stocks at SHFE have declined in the last one month.

After the Covid-19-led cratering of the economy in January-February, China pumped an enormous fiscal stimulus to build bridges, roads, utilities and broadband and railroads across the country which helped a sharp V-shaped recovery for China’s manufacturing sector. Industrial production in October showed a strong 6.9 per cent growth, recovering from a negative 13.5 per cent in February.

The manufacturing PMI stood at 51.4 in October, recovering from a low of 35.7 in February. The y-o-y increase in fixed asset investment (total amount spent on capital investment including factories, roads, power grids, etc) for October was at 1.8 per cent, up from 0.8 per cent in the previous month; since February, fixed asset investments had been on a decline. The third quarter GDP was reported at 4.9 per cent against 3.2 per cent in Q2 and a negative 6.8 per cent in Q1. As per IMF forecasts, China’s economy will expand by 1.9 per cent in 2020, making it the only major economy not to suffer a recession this year.

China’s new infrastructure plan will continue to boost metal demand, say reports.

Will China grow further?

Fitch Solutions, in a recent report, predicts that new infrastructure plan will work in tandem with China’s other industrial policies such as Made in China 2025 and China Standards 2035 Plan, and help it become the global leader in high-tech industries of the future. Fitch believes that Chinese domestic demand for high-end copper, aluminium and steel will face a strong boost from 2020 onwards, along with the government’s existing ambition to move up the metals production value chain. It is expected that new infrastructure projects in China would require nearly 1million tonnes of high-end aluminium and 32 million tonnes of specialty steel in 2020 alone, accounting for 3 per cent of domestic demand for both metals. This figure will rise in 2021 and 2022 as more projects are under construction.

That said, analysts warn that China’s economic activity may gradually slow by the end of 2021. The fiscal stimulus, when withdrawn, will weigh on infrastructure demand and drag prices of metals lower, they add.

Priyanka Jhaveri, base metals analyst, Kotak Securities added, “Rally across most metals seem to be overdone currently and hence look vulnerable for correction, but because of Chinese demand, the price trend should remain positive to sideways in the months to come. It is too early to comment about 2021 and beyond…”