Column: China loses its luster as a driver of the metal price rally
LAUNCESTON, Australia (Reuters) – What is likely to be a bigger factor for Chinese demand for imported metals – the continued release of copper, zinc and aluminum from strategic reserves or the weakening of manufacturing outlook as economic growth slows?
Assigning a level of importance to either factor is probably a mad rush. The only sure thing to say is that both are bearish factors and undermine the general bullish narrative in commodities as the world continues its patchy recovery from the coronavirus pandemic.
Chinese factory activity increased in July at the slowest pace in 17 months, with the official purchasing managers index (PMI) rising to 50.4 from 50.9 in June, remaining above the level of 50 points separating growth from contraction.
The index has now been down for four consecutive months, and the distribution of the sub-indices is far from encouraging.
The new export orders sub-index stood at 47.7 in July, after declining for three consecutive months, and is now at its lowest level in 12 months.
The raw material costs sub-index fell to 62.9 in July from 61.2 in June, highlighting how high raw material costs have undermined the profitability of industrial companies and likely deterred some Chinese exporters from taking some orders.
There is also a relatively strong correlation between China’s PMI and imports of major metals, copper and iron ore, the raw material used to make steel.
Chinese imports of raw copper have tended to decline since the strong recovery from the coronavirus pandemic amid stimulus spending in the middle of last year.
They peaked at 762,211 tonnes in July 2020 and have been falling steadily since, except for a brief peak in March of this year, when 552,317 tonnes were imported, a level still well below that of July of last year.
Since that coup, copper imports have fallen again, the 428,437 tonnes in June bringing them down to levels lower than the months when the coronavirus epidemic led China to shut down most of its economy in the first quarter of 2020.
Imports of iron ore also followed a downward trend, with 89.42 million tonnes in June being the lowest since 87.03 million in May 2020.
Pandemic stimulus spending saw imports hit a record 112.65 million tonnes in July last year, and in the 11 months that followed, nine saw monthly declines.
There is a caveat when it comes to valuing imports of copper and iron ore that part of the decline, especially for iron ore, has been linked to problems supply, the main exporter Australia suffering from weather disruptions and the second largest exporter Brazil still battling the coronavirus outbreaks, which have impacted mining operations.
It is likely that iron ore imports will increase in the coming months as supply issues are resolved, but it is equally likely that the gains will be modest given the measures taken by Beijing to limit annual production. steel in 2021 at the same level as in 2020.
China’s iron ore imports in July are estimated at 89.5 million tonnes by commodities analysts Kpler, and if the official result is at about the same level, that would mean little change from that. which was a weak result in June.
Copper imports could also continue their downward trend in July, given the release of metal from strategic reserves and a policy reversal that saw imports of scrap copper increase.
China completed the second metal auction last week, selling 30,000 tonnes of copper, 50,000 tonnes of zinc and 90,000 tonnes of aluminum.
Further auctions are possible, as the National Food and Strategic Reserves Administration has said it will continue to sell metals from its reserves in the short term based on market demand, supply and price trends.
The question for market participants was whether the volumes offered were large enough to make a big dent in prices.
True, domestic zinc and copper prices in China have retreated in recent weeks, with Shanghai zinc futures ending Monday at 22,585 yuan ($ 3,490) per tonne, down 2.4%. from the 2021 closing peak of 23,135 yuan on May 19.
Copper futures closed at 71,450 yuan per tonne on Monday, down 7% from their 2021 closing high of 76,840 yuan on May 10.
These are relatively modest declines and attributing them to the release of strategic reserves, rather than a general slowdown in demand as economic growth slows, would be an important call.
For now, it looks like China’s role as a driver of the metal price rally is over, and that could become a drag if the downward trend in imports continues in the coming months.
The views expressed here are those of the author, columnist for Reuters.