Metals Outlook: Concerns over slower global growth outlook, feeble demand from China
Synopsis
Weak economic indicators from China and concerns over global growth are hampering demand for industrial metals, with most trading at lower levels than in April. Copper and lead prices declined due to demand concerns, as did aluminium and zinc, which shed more than 50% so far. The property sector in China is beginning to stabilise, but recovery remains subdued due to high debt levels and inflation, while retail sales numbers have posted a contraction. Supply outlook for 2023 is encouraging and a deceleration of global growth and muted demand from China will continue to dominate the metals market.
On the key LME market, aluminium, the second most widely used base metal, and zinc shed more than 50% so far. Likewise, copper and lead prices declined over 20 percent due to demand concerns.
A similar trend was witnessed in the key Shanghai futures exchange and domestic MCX prices as well.
In the first quarter of 2023, there was a surge in metal prices on optimism for a robust recovery in China after it reopened its economy. This optimism faded in the second quarter due to a series of weak economic releases that continued to trickle in from the country.
Now the world’s second-largest economy seems to be losing momentum and appears to be teetering on the brisk of deflation.
China’s growth was mainly driven by industrial activity and consumer spending. In the last few months, factory output numbers have declined unexpectedly. Likewise, the key gauge of consumption, the retail sales numbers, have also posted a contraction. In the first five months of 2023, fixed asset investments missed estimates.
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The property sector in China has begun to stabilize, but recovery remains subdued due to high debt levels. High inflation levels, tight monetary policy, and worries over credit constraints following the recent banking crisis in the US and Europe also dampened consumer demand.
As optimism over China’s reopening fizzles, top investment banks like Goldman Sachs and JPMorgan recently cut their full-year GDP estimates and warned of a headwind ahead.
However, to prop up growth, the Chinese central bank has cut two of its benchmark lending rates for the first time in 10 months this week. The one-year loan prime rate and five-year loan prime rate cut were cut by10 basis points each.
The latest cut in rates was followed by the two monetary policy easing moves last week. The People's Bank of China (PBOC) cut its one-year medium-term loan facility and lowered its seven-day reserve repurchase rate last week.
The supply outlook for 2023 is encouraging as the temporary production and supply bottlenecks of metals have now been resolved. A drop in coal, crude oil, and natural gas prices are supportive of higher output. Many European smelters which had earlier halted operations due to high energy costs, have now restarted production and are poised for an excess supply. In addition, it is anticipated that various metals will see additional production capacity this year.
Looking ahead, if the demand from China is muted, the outlook of metals will continue to be on the lower side. A balanced supply-demand dynamics and a forecast of feeble global growth rate will also affect the price sentiments. However, there are expectations that Chinese policymakers would come up with more powerful measures to boost economic activities that may insulate prices from major liquidation.
(The author is Head of Commodities at Geojit Financial Services)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)