Aluminum prices: Is China opening the stimulus taps? – Steel, aluminum, copper, stainless steel, rare earth and metal prices, forecasts
This is not a trivial question. Over the past two decades, China’s infrastructure spending has been driving demand growth for steel, copper and aluminum prices. So when the South China Morning Post reported that local governments sold 1.94 trillion yuan ($289 billion) worth of bonds in June to fund infrastructure spending and spur economic growth, markets were fired up. noted.
Chinese government remains focused on infrastructure
This news follows the announcement made last month by the Chinese State Council summit. At that time, they said state banks would increase their credit lines to provide 800 billion yuan of financing for infrastructure projects.
So far this year, emissions have exceeded Rmb5tn, reports the SCMP. The majority, around Rmb 3.4 trillion of this amount, came from special purpose bonds aimed specifically at financing infrastructure. Yet the figure represents 93% of the central government’s annual quota for such bonds. This seems to suggest that the second half of the year will see a sharp decline.
However, a Financial Times Unhedged article cites Bloomberg’s report that China’s Ministry of Finance plans to allow local governments to sell 1.5 billion Rmb ($220 billion) of special bonds in the second half of the year. of this year. This suggests that funding quotas will be exceeded this year as a whole.
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Copper and aluminum prices could rise
Aside from the record infrastructure bond sales already achieved, the expected out-of-quota infrastructure bond sales, the Development Banks Infrastructure Fund and Unhedged believe that increasing the lending quotas of these banks amounts to 2.6 billion Rmb. That’s over 2% of gross domestic product and enough to push the bull market for metals.
On top of that, early indications suggest that the funds are not primarily aimed at China’s beleaguered housing sector. Instead, they can go to public works. In this case, railway electrification and electricity could be particularly beneficial for copper and aluminum prices.
Share prices among Indian aluminum and steel producers all rose last week on the news. In fact, they have risen by more than 5% in most cases, as investors view increased funding as a positive for Indian metal exporters. But whether the news boosts metal prices or stock prices elsewhere remains to be seen. Much of that will depend, most experts say, on whether the boost provided by increased infrastructure spending is dampened by woes elsewhere.
China’s economy still faces challenges
China has suffered ongoing COVID lockdowns, and anecdotal evidence provided to MetalMiner suggests that unemployment is becoming a serious issue. In this unstable domestic environment, and as developed markets face rising interest rates and the threat of a recession, there are countervailing negatives at home and abroad.
Most metals markets were assessed as surplus in the first half of this year. In fact, aluminum has gone from a deficit last year to a surplus this year despite historically low foreign exchange inventory levels.
China has been an exporter of many metals despite tariff barriers discouraging exports of energy-intensive aluminum and zinc. So if demand were to pick up in China, it wouldn’t take much for those exports to stop. If that happened, an inventory-starved market outside of China would feel a lot of pressure, despite the limits of the demand recession.
It’s too early to tell, but China’s recent moves suggest we shouldn’t rely on their growth by pumping money into the construction sector. If that happens, it could serve to support metal prices in the second half and beyond.
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