A Tale of Two Metals Rallies

Look to the different trajectories of steel and aluminum to understand why.

In a metals market dominated by China's voracious materials demand, it's tempting to believe that what's good for the goose is good for the gander.

So when prices of the two most widely consumed metals -- steel and aluminum -- both surge in tandem, as they did Monday, surely the reason is the same: China is hungry for metal, and the world is unable to fill its stomach.

That certainly appears to be supported by the country's purchasing managers index, which has outpaced analysts' expectations for two straight months after trailing them for most of the year.

Shining Future

Chinese metal futures have had a good three months

Source: Bloomberg

Note: Rebased. May 8, 2017 = 100. Shows prices of generic front-month futures.

A closer look, though, suggests stronger short-term factors are underpinning the rise in ferrous metals. Aluminum, meanwhile, appears more prone to corrosion.

The reason is to do with the ease of stimulus. As Gadfly argued when iron and steel were stuck in the doldrums back in May, the best reason not to bet against those metals was the fact that you'd be indirectly betting against Beijing. Even authoritarian governments want to frame major political events with a sense that the state of the union is strong, so it's no surprise that China's rulers are trying to juice the economy ahead of the Communist Party's approaching five-yearly congress.

That helps explain the 28 percent gain in Shanghai-traded steel rebar, and the 18 percent rise in Dalian-traded iron ore, since the date of that column. Why, though, has aluminum put on a less impressive 12 percent over the same period?

The answer comes from looking at consumers. One of the key long-term attractions of aluminum is that it's a so-called late-cycle commodity. Steel's use in construction and heavy industry means that consumption tends to boom when an economy is industrializing, then fall as it grows richer and rebalances toward household spending. Aluminum shows a different profile, continuing to grow in rich economies because of its use in more consumer-driven sectors such as packaging, household appliances, automobiles and aircraft. 

Foundation Stones

Steel is far more leveraged than aluminum to China's construction industry

Source: Rusal, Macquarie, Gadfly calculations

Note: Based on 2013 estimates for China.

If Beijing wants to engineer a spurt of economic growth, steel-intensive sectors are a good way to go about it. More than half of Chinese steel goes into the construction industry alone. Throw in machinery (where state-owned enterprises dominate) and you're past two-thirds of total steel consumption, according to Macquarie Group Ltd. estimates.

Aluminum is different: It's less responsive to diktats from Zhongnanhai and less likely to motor forward when the government puts its foot on the accelerator. 1

China's government wants to boost heavy industrial activity over the next few months. From the perspective of ferrous metals, that's broadly synonymous with "more end-user demand," which should be bullish for prices. From the perspective of aluminum, though, "more heavy industrial activity" is likely to mean "more smelter construction" or at least "fewer smelter shutdowns," a dynamic that's weighed on prices for a decade and doesn't seem set to end any time yet.

That's a reason to be skeptical of aluminum's strength, and to bet on steel and iron remaining elevated, at least for the moment. Once the congress is over and winter smogs start to drive calls for industrial shutdowns, we may get a clearer picture of China's underlying metals demand. Until then, politics is in the driver's seat.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. It's hard to pick out exactly how much demand comes from the state and how much from private industry -- especially in a country like China, where the line between those two segments is permeable. A large share of construction demand, for instance, comes from private real estate developers, while "transport equipment" encompasses both ships, trains and aircraft -- built almost entirely by state-owned enterprises -- and cars, which are driven more by consumer demand. 

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Matthew Brooker at

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