China and the impact on industrial metals

China has been trying for months to stimulate economic growth after failing to open up to the world earlier this year following months of covid restrictions. The Chinese authorities promised a number of tools to stimulate economic activity, but lacked those designed to lead to strong growth. China has a huge debt problem, so the authorities had to be mindful of curbing a potential bubble. After a number of failed attempts, China appears to be on track for a boost, although the stability of the property sector remains a further mystery.

Recent survey data from China gave a rather mixed reception. The government's official manufacturing PMI index rose to 49.7 points, the third consecutive increase since the May low of 48.8 points. However, the index still remains below the expansionary limit set at 50 points. The PMI for services, on the other hand, fell to 51 points in August, so slightly above the expansionary limit. It seemed at the beginning of September that, once again, Chinese measures had failed.

Meanwhile, hard data on industrial production and retail sales quite positively surprised investors. Sales are up 4.6% YoY against an expectation of 3.0% and against a previous increase of 2.5%. Industrial production, on the other hand, which has remained flat in recent years, grows by 4.5% YoY against an expectation of 3.9% and against a previous growth of 3.7%.

China has made quite a bit of change recently, although not as spectacular as just a few years ago when the economy was struggling. There have been cuts in official interest rates, in addition to the second cut in the reserve requirement rate this year in September, which will free up new funds for lending. From the end of September, the policy of lowering loan instalments will also take effect, although the details are to be negotiated between customers and banks. It is difficult to say when we will see an improvement in the data following the introduction of these measures, as in recent months we have seen quite a fall in property sales among developers, who have had a lot of trouble settling their obligations recently. Ultimately, however, there have been no spectacular collapses and key liabilities have been settled with the help of the state and banks.

Iron ore

If the stabilisation of the property market can be maintained or even lead to a recovery, this could mean a stabilisation or even an increase in prices in the metals market. The biggest increases could be in iron ores, whose stocks have fallen to near three-year lows and China has clearly increased imports recently. The low stocks have been linked to a reduction in activity by some steel mills. Nevertheless, autumn is one of the key construction seasons of the year, in view of which, at least for a while, relatively high prices, above $100 per tonne, can be expected to be maintained. Iron ore is, of course, key for AUDUSD. 

Copper

Despite copper stocks remaining at extremely low levels for an extended period of time, copper prices have not scored any major rally this year, other than that of January when there was euphoria over the opening of the Chinese economy. However, prices have fallen from peaks around $8500 per tonne to as low as $8000 and are now stabilising near $8500 per tonne. Stocks have risen slightly recently on global exchanges, while imports in China are starting to rebound. However, the credit impulse in China remains negative looking at the 12-month change, which for now does not give much hope for a strong price rebound. Of course, copper is being used increasingly in the high-tech sectors at the moment, but all the time the vast majority of demand is coming from the infrastructure sector.

Copper versus credit stimulus, which has a 12-18 month lag effect on the economy. Source: Bloomberg Finance LP, XTB

Stocks remain low, although starting to rebound (inverted axis). Source: Bloomberg Finance LP, XTB

Nickel

Nickel stocks are as extremely low as copper, but there has been a significant increase in production of the metal in China, so moderate declines can be expected in the coming months. In all likelihood, by the end of this year we will find ourselves around $1000-2000 below the current lows of $20000 per tonne. In the longer term, one has to keep in mind the metal's use in the battery sector, so low prices should not last too long.

Aluminium

The price of the raw material is primarily linked to the health of the construction sector and reacts rather belatedly to what is happening on copper. The price is stabilising between  $2100 and $2300 per tonne and without a major recession we should not expect prices to fall below the lower limit of the consolidation. Only larger increases on copper and a weakening of the dollar could pull aluminium out of its slump and lead to a rise in the vicinity of  $2,500 per tonne. However, this is unlikely to happen this year.