Gavin Maguire and Min Zhang

BEIJING/SINGAPORE – China’s vast army of metal processors has become sellers in the face of a drastic drop in world manufacturing activity. It is a sign that steel, aluminum and other important industrial commodities are at risk.

As Chinese buyers searched for metals, they drove the worldwide surge in prices between mid-2020 and end-2021. In anticipation of rising metals prices further, these buyers scour the globe looking for new ores and metals.

The order flow has been reversed ever since March when recurring COVID-19 epidemics have forced extended factory and store closures. These shutdowns have cut off purchases of heavy metal-intensive goods, such as cars and appliances. They also lowered the prices of inputs to manufacturing.

The selling pressure can be seen in metals futures price. The trend in the prices of iron ore, aluminium and zinc through 2022 is shown by futures curves.

(Graphics: https://fingfx.thomsonreuters.com/gfx/ce/klvykoblevg/ChinaMetalsCurvesMay2022.png)

The weakness in the construction industry, which is responsible for around half of all steel production and about 30% of aluminum used in China, has further undermined sentiment in metals sector sentiment. Some processors and traders have decided to let their inventories go into the weakening domestic markets rather than store them for sale later to end-users.

Each round of pandemics across the country had delayed downstream demand. It could pick up in July but it will rain then,” Qi Xiaoliang (a Beijing-based steel trader) said.

Qi is no longer willing to keep his metal stocks in depreciation until demand increases, so he has begun to liquidate inventories for 150 to 200 yuan ($22.56-30.09) less than his purchase costs.

The trend has been followed by other producers of intermediate metal products, which reverses traditional trade patterns and clouds the short-term outlook on metals demand in China.

(Graphics: https://fingfx.thomsonreuters.com/gfx/ce/lbpgndzmavq/3YearMetalsPricePerfChina.png)

John Johnson CEO of CRU China, said that “the issue is complicated, as China is a Net Exporter of certain Metals, like steel, aluminium and nickel, but a Net Importer of other Metals, like nickel and battery metals.”

China will not change its long-term strategy for adding value to exports, despite short-term shifts in demand and relative price.

STUNTED TIMULUS

Beijing announced a range of measures, including allowing loan repayments delays and cuts in benchmark lending rates. However its zero-COVID policy prevents Beijing from taking more immediate steps to revive economic activity.

China’s supportive policies are not enough to counter the stringent COVID-19 regulations. Analysts from ANZ Research reported that Lending and Key Property Indicators are “still subdued”.

Factory and construction activities have been halted just as they peak, which has meant that metals producers are deprived of an important window to market their products.

(Graphics: https://fingfx.thomsonreuters.com/gfx/ce/znpneoxrjvl/metalproduction.png)

Many key metals-intensive items, such as refrigerators and shipping containers, have seen their output fall behind that of 2021. This trend will likely continue as long the movement restrictions are in effect.

In the same way, summer is a time when construction sites are usually bustling with activity. Workers stay at home.

(Graphics:https://fingfx.thomsonreuters.com/gfx/ce/lbvgndlaepq/output0524.png)

Due to the credit crunch, property sector activity has been stifled. In fact, new construction began falling by 26.3% in the first quarter of this year.

This has resulted is a decrease in demand for copper in plumbing, wiring and appliances. Che Guojun from Antaike state-backed analyst says that the copper content in appliances could drop by 2% in 2022, down from 1.79million tonnes last year.

The world’s largest auto market has seen a decline in vehicle production and sales. The result was that auto sheet production at Beijing Shougang Co Ltd, the world’s top producer of automobiles, fell 17.6% between January and April compared to the previous year.

According to Mysteel consulting data, Reuters calculated that steel product inventories rose 9.4% over a year, reflecting this decline in demand.

(Graphics: https://fingfx.thomsonreuters.com/gfx/ce/gkvlgzlodpb/steelstocks.png)

Goldman Sachs (NYSE;) reduced its 2022 growth outlook to 4% due to China’s slowdown. It was lower than China’s official goal of 5.5%.

The bank recently stated in a note to clients that, “Infrastructure stimulus should generally be positive for commodity demand but we think its net impact should slightly less… because projects could be less commodities intensive than in past years.”

BRIGHT SPOT

Although major industrial commodities are suffering from China’s slower usage, experts remain positive about certain products.

Yu Mengxue (an analyst at Shanghai Dalu Futures) stated, “New Energy Vehicles and Batteries still remain high-growth and awaiting demand recovery… sentiment towards the new sector is still hopeful.”

Others predict that the promise to stabilize the economy by Beijing will lead to a rise in demand later this year.

Malan Wu from Wood Mackenzie, research director, said, “Government support worked in past. The exact benefit is hard for us to pinpoint, but we’re hopeful.”

($1 = 6.6475 renminbi)