Will Chinese stimulus be able to revive metals’ fortunes?

Post 2012, base metals have witnessed a dismal performance. China – the biggest consumer of base metals – has been losing steam rapidly. Growth levels have dropped to the lowest in 24 years.

Prime reason for flagging growth in the world’s second largest economy is declining industrial production which increased at its slowest pace in March 2015.

Not only this, gloomy economic scenario just worsens as retail sales, a sign of consumer demand, rose at the slowest rate in nearly a decade and land purchases by developers, a major source of revenue for China’s heavily indebted local governments, fell 32 per cent in the first three months of 2015.

To boost growth, China has taken a string of monetary easing measures in the past one year including cut in reserve rate requirement and minimum down payment required on second-home purchases. China’s Premier Li Keqiang also pledged to speed up construction of railways and housing for the poor to promote infrastructure growth.

However, this is clearly not enough as PBoC recently warned of deflationary pressure in the economy in May ‘15 as it forecasted subdued consumer prices for the year and a challenging growth outlook for 2015.

Most importantly, China’s economic growth slowed to 7 per cent in the first quarter of 2015, its slowest in six years and expanded 7.4 per cent in 2014, its slowest pace in 24 years and undershooting the government’s target for the first time since 1998. Apart from macroeconomic concerns, weak Chinese growth also affected fundamental demand-supply dynamics.

The leader metal, copper, has suffered the most as shown by the International Copper Study Group figures wherein refined copper market balance in January 15 showed a surplus of 59,000 tonnes, compared with a deficit of 142,000 tonnes in January 14. Nickel prices continue to trade lower as Indonesia’s export ban on unprocessed ore has been offset by surging exports from the Philippines.

On the other hand, aluminium has been amongst the top performers as prices strengthened after production cuts outside of China have moved the market excluding China into deficit. However, gains could not be seen as the Chinese markets remains in surplus and capacity continues to rise. The only gainer has been zinc whose prices have increased on continuously falling inventories and concerns that future mine closures will leave the market in deficit.

Talking about the Indian economy, the scenario is quite opaque as despite the GDP numbers recorded in the Q4 2014 are quite encouraging at 7.5 per cent, thereby making India the fastest growing major economy in the world, beating China, a closer observation shows that Gross Value Added (GVA) was disappointing attributable to the slowdown in Services as the government had virtually stopped spending to meet the deficit target.

On the other hand, latest CPI figures consumer inflation fell to a four-month low of 4.87 per cent, well within the RBI’s target range and is likely to coax the RBI to cut interest rates for a third time in five months when it meets on June 2. Along with mixed signals from the domestic economy, uncertainty in the international markets regarding Greece debt repayments and US interest rate hike in 2015 will keep the rupee under pressure in the near term and provide much needed respite to the metals in the domestic markets.

From a two month perspective, LME base metals prices will continue to trade lower as China’s attempts to boost spending, infrastructure and construction have not yet shown the desired results. Moreover, revival in the economy is not expected soon as the IMF has pegged China’s GDP growth for 2015 and 2016 to slow further at 6.8 per cent and 6.3 per cent, respectively. In addition, usual peak-demand period from April to June for downstream industries such as construction is already nearing an end without a significant pick-up in demand.

The only saving grace after recent weak retail sales and industrial production data along with burgeoning deflationary pressures could be more policy easing which is widely expected from China.

The writer is Associate Director – Commodities & Currencies, Angel Commodities Broking Pvt. Ltd. Views are personal.