In spite of our TV screens being bombarded with news about Middle East unrest and the financial pages of our papers reporting seemingly endless stories about European debt problems, metal prices are being swayed just as much by what is quietly happening in China today as they were 6 or 12 months ago before current news took center stage. The rate of inflation in the world’s second biggest economy and the resulting steps Beijing is taking to try to cool growth without pushing too far and causing a slump have had observers (both supporters and detractors) fascinated for much of the last 9 months.
Just this week Reuters reported comments by Codelco CEO Diego Hernandez at the start of the CESCO copper industry gathering in Santiago expressing concern about rising copper stocks in China. “It’s not normal. There is something going on. Stocks are high and some people believe the stocks are being used as a financing tool,” he said well no surprises there, Diego, you should be reading our columns. The point is, rising stocks in a market where the Chinese have not been buying means slowing consumption. Slowing consumption points to a slowing manufacturing sector, hence much of the weakness in the current copper price relative to earlier this year.
The authorities remain confident about growth. Chalco is predicting 7-8 percent growth in comments to Bloomberg and the company’s vice-president Liu Xiangmin said at a conference in Singapore, “There are many large construction projects on the national and town level in the 12th five-year plan, he said. “Demand will continue to grow. Demand for aluminum in the construction sector accounted for more than 35 percent of total consumption last year and is likely to maintain a similar level this year in Chalco’s view. Still, even Liu agreed copper prices were at risk of further tightening in the economy and that he expected a retrenchment during this year.
MarketWatch reported this week that China’s central bank lifted its base lending and deposit rates a further quarter of a percentage point, effective Wednesday, April 6. The one-year deposit rate will rise by 25 basis points, to 3.25 percent, while the one-year lending rate will increase by the same increment, to 6.31 percent. The increase by the People’s Bank of China was the first since a quarter-point rise Feb. 8, which in turn followed a quarter-point increase on Christmas Day and came in spite of signs the economy is already slowing to a more sustainable growth rate.
China PMI numbers came in at 53.4 for March up from 52.2 in February as would be expected, there is almost always a seasonal rise in March after February’s New Year holidays. In a Standard Bank note to clients the numbers are analyzed in more detail. The month on month rise in the March PMI is the slowest for any February since at least 2005 the bank says. The average m/m rise for March between 2005 and now is 6.1% – this year it was only 2.3%. Secondly the sub-index of inventories of finished goods pushed higher from 46.6 to 51.4. This could indicate more finished goods are being manufactured, but less is being sold. This is consistent with the current inventory build we are seeing in copper and some other metals in China too. This week we will see China’s March trade balance. In February, it was in deficit, the market expects another deficit. China has not had two consecutive trade deficits since 2004. If we see a trade deficit in March, the bank advised it would read this as another sign of higher inflation and a stronger currency affecting China’s competitive position, supporting further tightening to fight inflation but negatively impacting metals.
So dramatic as other items of news may be, metal buyers would do well to keep an eye on what is happening in China too. So far the Chinese have maintained a remarkably good balance of increased tightening whilst maintaining more modest growth. The most difficult part may be yet to come as rising energy prices and inflation in other parts of the world upset the current balance in slowing recovering markets.