On Wednesday, the People’s Bank of China weakened the yuan/renminbi to its lowest level in five years. The actual cut was small: only about 0.34%. The Chinese yuan closed 0.2% weaker on Tuesday at 6.559 per dollar compared with that morning’s midpoint of 6.5468. Since the end of April, the currency’s value has dropped three weeks in a row.
It did not send world markets spiraling downward as panicked investors did last August when China devalued its currency by nearly 2%, or in early January, when it cut by about 0.5%.
How Fast is the Chinese Economy Growing?
China’s ruling Communist Party still claims the country is growing 6.5% to 7% a year. Capital Economics, among other independent forecasters, believes the real number is closer to 4.2%.
Click for full size. Source: Bloomberg News
Market watchers believe there is a struggle going on between China’s top leaders on what to do next.
The Wall Street Journal reported that, behind closed doors in March, some of China’s most prominent economists and bankers bluntly asked the PBOC to stop fighting the financial markets and let the value of the nation’s currency fall. They supposedly got nowhere with bank officials.
For the people of the U.K., and indeed the rest of Europe their decision could be a turning point in the future of their country and the wider European community. It is no exaggeration to say Britain’s exit could spark the break-up of the E.U.
The near-miss Austria experienced yesterday in voting in a far right president illustrates how extreme tensions within the European Union have become. Only by all the opposing parties supporting pro-E.U. Green party socialist Alexander Van der Bellen were they able to beat the far-right Freedom party candidate Norbert Hofer from becoming head of state, the margin was a miniscule 31,000 votes out of an electoral return of 4.64 million.
Dissatisfaction with the E.U., supported by fears of immigration destroying the social fabric and cultural heritage of societies across the continent, has played a major part in not just the U.K.’s referendum but in the rise of both far-right and far-left parties across Europe in recent years.
Anecdotal evidence can be very misleading, dependent as it is on the social mix such opinion is garnered from and the geographic location. Until recently, the decision in the U.K. seemed on something of a knife edge, particularly in the weeks following the announcement by Boris Johnson, London’s charismatic former mayor, that he was actively campaigning for the Leave vote, but in recent days the markets at least have been pricing in a Stay outcome, as evidenced by the strength of sterling.
Indeed, a poll this week showing a late swing by older voters to maintain the status quo resulted in a sharp jump in the value of the pound as this FT graph shows.
Source: Financial Times
Alluring as the Leave campaign’s image of a free and unrestricted future for the UK would be, most are coming to realize such an outcome is unlikely to be achievable. The least-damaging outcome in the months after leaving would be for a quick trade deal with the rest of the E.U. Read more
In a recent report from our own Raul de Frutos, all industrial metals have enjoyed a rally-intensive 2016 with the exception of one month: January. That was when the same metals hit new lows. So what is to account for this rebound? Is it worth noting or simply a mirage?
“Some metals — such as steel, zinc and tin — have gained significantly while others such as aluminum, copper, nickel and lead haven’t made much progress yet,” de Frutos wrote. “The price rally is not really being driven by supply cuts but by a combination of a weak dollar and the sugar rush of China’s stimulus, initiated late last year. We could be witnessing the end of this five-year-long commodity bear market, however, there is something rotten about this rally.”
Raul added that China’s stock market is the most accurate barometer for its economy and, ever since 2011, its stock market along with its commodity prices, have fallen. So what could appease our worry about this particular metals rally?
De Frutos concluded: “A good start would be China’s stock market rising above April’s levels. Otherwise, metal bulls can only hope for a choppy market.”
You can find a more in-depth nickel price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.
Iron ore prices have been on a roller coaster this year, yet reports abound of excess iron ore supply, excess steel production, excess steel capacity and falling property prices and, by extension, excess appetite for construction steel.
There is still mine oversupply. Source: Adobe Stock/nikitos77.
This week, reports of rising port stocks, up 1.6% to 100.45 million metric tons or five weeks of supply should have depressed prices, but the prevailing mood among traders seems to be one of cautious optimism that iron ore consumption and, hence, steel production will continue strongly this year, so much so that iron ore prices actually rose 2.7% to $54.98 per mt late last week. Read more
Some metals — such as steel, zinc and tin — have gained significantly while others such as aluminum, copper, nickel and lead haven’t made much progress yet. The price rally is not really being driven by supply cuts but by a combination of a weak dollar and the sugar rush of China’s stimulus, initiated late last year. We could be witnessing the end of this five-year-long commodity bear market, however, there is something rotten about this rally.
Chinese Stock Market Has Yet to Find Traction
China stock market ETF weakening since April. Source: @StockCharts.com.
China’s stock market is possibly the best benchmark for China’s economy or at least investors’ sentiment on China. The slowdown in the Chinese economy (weak demand while too much capacity) explains why industrial metals peaked in 2011.
Ever since, China’s stock market has fallen with commodity prices. Earlier this year we witnessed a rally in the Chinese stock market but the rally has been shy so far and it has, indeed, weakened since mid-April amid worries that Beijing might pull back on monetary stimulus while it steps up structural and financial reforms even as the economic recovery struggles to gain traction. The stock market weakness also comes after worse-than-expected economic data for April, suggesting that the financial stimulus package unleashed in China earlier this year could be losing its impact.
Base metals ETF (in brown) rising with China stock market ETF (in blue). Source: @StockCharts.com.
In the chart above we see how China’s stock market rose as China unleashed its stimulus program back in 2009 and how metal prices surged with it.
While overcapacity is still a problem, we’ll likely need to see China’s stimulus measures make a significant impact and that should be reflected in its stock market. A good start would be China’s stock market rising above April’s levels. Otherwise, metal bulls can only hope for a choppy market.
Goldman Sachs is reported in a recent article as saying recent price gains this year may be seen as a swansong for the sector and prices are expected to fall back later this year as the underlying fundamentals reassert themselves over the recent speculative euphoria that has driven prices higher, particularly in China.
There is still mine oversupply. Source: Adobe Stock/nikitos77.
As we have come to expect with metals prices, so much has to do with China, whether it is demand in the case of iron ore, copper, nickel or supply as in the case of steel or aluminum, China dominates the landscape and calls the shots — whether its intends to or not. Read more
The CME Group is taking actions to more directly compete with the London Metal Exchange and China’s Ministry of Commerce has responded to tough U.S. tariffs and anti-dumping duties.
CME Group Will Take on the LME
The CME Group is talking to several warehouse companies to expand its metal storage network globally, three metal industry sources exclusively told Reuters, a move that could further challenge the London Metal Exchange‘s (LME) dominance.
The comments were posted on the ministry’s website following a decision on Friday by the U.S. International Trade Commission to continue probing imports of certain steel products from 12 countries, including China and Korea.
We noticed in March that copper, aluminum and nickel were lagging badly in this year’s industrial metals rally, and they still are. Copper fell this week below $4,600 per metric ton, the lowest level in two months.
Three-month London Metal Exchange Copper hits a two-month low. Source: Fastmarkets.com.
Overcapacity issues are still visible. Last December, a group of Chinese smelters announced intentions to cut refined copper output. However, recently, China’s largest copper producer,Jiangxi, said those output cuts have been offset by new capacity there.
Also, earlier this month, Rio Tinto Group approved a $5.3 billion expansion to more than double output at the Oyu Tolgoi copper mine in Mongolia, making it one of the world’s largest copper mines. Rio is also expanding its iron ore efforts. Even though almost everyone seems to agree that the market is oversupplied, copper producers seem quite optimistic on the long-term picture. Read more
The Commerce Departmentdelivered final determinations in the case of Chinese cold-rolled steel this week, and while Commerce upheld the 265% duties initially placed on the imports, the agency also added 256% countervailing subsidy duties, nearly doubling the duties on Chinese cold-rolled.
It’s safe to say the gauntlet’s been thrown down when it comes to Chinese steel imports. Doubling up the duties shows that Commerce finally isn’t kidding around and that the reforms passed by Congress last year have teeth.
Freight, whether by boat or by train, is being checked and inspected more vigorously by U.S. Customs and Border Protection.
Still, we wondered what effect this would have on U.S. manufacturers. Not only the ones accustomed to lower prices from foreign imports, but also the ones who export their finished goods to China. To paraphrase J.R.R. Tolkien, open trade war is upon you whether you’d risk it or not!
China’s not taking it with a grain of salt, either. The Ministry of Commerce said on Saturday that it was gearing up for a legal challenge over the steel duties, most likely by opening an arbitration panel in the World Trade Organization.
The WTO is a better venue for China than Commerce or the U.S. International Trade Commission, which is likely why most Chinese steelmakers did not respond to Commerce’s requests for information in the cold-rolled case. What more might come out at the WTO is anybody’s guess.
“China will encourage and support its steel companies to defend themselves according to law, and China will safeguard the legitimate rights and interests of its steel companies using World Trade Organization rules,” the Ministry said in a statement today, less than 24 hours after Commerce announced further investigations into China’s steel industry.
Understandable since there probably aren’t even any Chinese steel mills that can make money exporting goods to the U.S. with 522% tariffs upon entry. My colleague Katie Benchina Olsen reported this week that Customs and Border Protection is getting better at flagging trans-shipments and other tricks to avoid the duties, too.
The trade war is definitely on. Whether it ends quickly is up to the countries and companies involved.
The International Lead and Zinc Study Group recently released its latest findings, which revealed world usage of refined zinc metal is projected to grow 3.5% in 2016 due mostly to a 4.5% increase from demand in China.
The Far East nation’s demand is expected to grow due to continued investment in its infrastructure. In addition, Europe is expected to remain stable in 2016 after improving 3.2% in 2015 as far as zinc usage is concerned.
Growth as high as 13.1% is expected in the Republic of Korea with increases also projected in India, Japan and the U.S.
As for supply? The ILZSG report states: “A sharp forecast fall in ex-China zinc mine production of 9.4% is due to a combination of mine closures and recently announced production cutbacks. Chinese output, which is reliant on production from a large number of small mines, is forecast to grow by 12.4%. Overall global zinc mine output is expected to fall by 1.4% to 13.27 million metric tons.”
Furthermore, Australia is expected to significantly reduce its production by 46% as a result of mine closures last year.
The ILZSG concluded: “Despite the fact that lower output is also expected in a number of other countries including Canada, India and Kazakhstan, current forecasts indicate that these reductions will be more than balanced by anticipated rises primarily in China, the Republic of Korea, Namibia and Norway. However, taking into account the predicted decrease in zinc mine supply it is possible that zinc metal production expectations in some countries may be subject to downward revisions later in the year.”
You can find a more in-depth zinc price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.