Photographer: Tomohiro Ohsumi/Bloomberg

China Metals Bulls Aren't Panicking Just Yet as Rally Fades

Updated on
  • President Xi squeezes lending in push to deleverage China
  • Campaign saps ‘animal spirits’ in metals, says David Lilley

China’s metals bulls are taking a pause rather than sounding the retreat.

A gauge of six metals on the London Metal Exchange slumped Monday to its lowest in four months amid a collapse in copper and aluminum prices. As industry participants gathered in Hong Kong for the LME’s annual Asia event this week, the hope for some is that a market that hit the skids in April is experiencing a blip and not a retreat to its 2016 lows.

Optimism over base metals, which had been gathering strength since the end of last year, is now facing jitters over Chinese consumption and rising stockpiles, and a drop in steel prices that’s fueling negative sentiment across industrial commodities. The world’s biggest consumer is embarking on a financial deleveraging campaign that’s threatening demand for raw materials. While it’s shaking short-term sentiment, it needn’t jeopardize the bigger picture, according to the chief executive officer for China at consultant CRU Group.

“Metals are taking a bit of a breather,” John Johnson said in an interview ahead of LME Week Asia, predicting that prices will recover to finish the year broadly higher than current levels. “The world economy is doing pretty well, China remains a pretty positive story, and then, irrespective of what is happening with inventories and demand, there are still growing concerns around supply -- particularly for copper.”

Six months ago, when the LME held a similar event in London, metals were on the cusp of an advance that accelerated through the first quarter of this year following U.S. President Donald Trump’s election.

The rally was predicated on commodities-intensive growth in China, bolstered by visions of a massive U.S. infrastructure spend and expectations of accelerating global growth. That’s now being tested by a sharp downturn in Chinese sentiment, triggered by President Xi Jinping’s concerted effort to reduce credit risks with a squeeze on lending. Some economic indicators for April also signaled a surprise softening in manufacturing.

Read more about China’s $500 billion deleveraging campaign here

That’s bolstered the bears. Speculation that metals would benefit from inflationary pressures have been replaced by fears over tighter liquidity, said Fan Xin, chief executive officer of Shanghai-based researcher SMM Information & Technology Co. “We are not bullish on demand,” he said in an interview. “It’s far too early to say that China’s manufacturing is recovering. It’s a common concern in the market on whether it will fall further.”

Copper prices could fall as low as $4,800 a ton this year in the most bearish scenario, according to SMM copper analyst Ye Jianhua. The metal in London currently trades around $5,520.

One wavering bull is David Lilley, co-founder of commodities-focused hedge fund RK Capital Management LLP. The deleveraging campaign in China has sapped “animal spirits and enthusiasm,” Lilley told an LME Week seminar, acknowledging that his February forecast of a deepening copper shortage underpinning prices had proved unfounded so far.

“Chinese demand is always the biggest unknown,” he said. “It’s 50 percent of global demand, and Chinese demand will set the prices.”

Only aluminum has held significant gains this year on the prospect of capacity cuts. Copper has slipped from a two-year high to a loss, despite strikes at major mines, while nickel is down 9 percent in 2017 as expectations fade that top exporter the Philippines will enforce last year’s environmental crackdown on miners. The battering given to iron ore and steel prices in the past month has reinforced concerns over a slowdown in Chinese construction. But those worries are overdone, according to CRU’s Johnson.

Bullish Echoes

That echoes Citigroup Inc., which earlier this week said it maintained a positive view as more land is developed in smaller cities. And while the Citi analysts noted “massive concerns” around second-half commodities consumption in China, they also said that real demand still looks stronger year-on-year across a number of sectors including manufacturing, infrastructure and home appliances, as well as real estate.

Notes this week from other banks bolster that sense of cautious optimism for metals. UBS Group AG named copper as one of its most-preferred commodities, citing firmer world economic growth and greater supply discipline for its broadly positive take on raw materials. Barclays Plc said it sees more copper mine disruptions to come, while Commonwealth Bank of Australia said it broadly expects “demand for metals to remain supported in 2017 as Chinese policymakers look to shore up growth before elections later this year.”

“There is no real sense of a major slowdown in China’s real estate,” Johnson said. “There’s no doubt it’s going to slow gradually over a period of time, but the government has made a huge effort to stop prices falling and we’re still not expecting any huge downturn overall.”

— With assistance by Martin Ritchie, and Winnie Zhu

(Updates copper price in eighth paragraph.)
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