It would seem Beijing only has to speak and the market reacts — this time, it’s about base metals.
Worried by what it sees as excessive inflation in commodity prices, which it fears will lead through into factory gate increases, China warned speculators last month over “excessive speculation.” The warning from China’s National Food and Strategic Reserves Administration hit the iron ore market hard, the Financial Times reports, sending the price 10% lower.
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China turns to base metals
This month, Beijing has turned its attention to base metals.
The authorities have hinted they may release metal from their strategic reserves. The move would be an overt attempt to dampen further price rises in what it sees as a speculator-fueled rally. Where applicable, it would provide additional supply for those metals where supplies are genuinely tight.
The country holds strategic reserves in copper built up over decades. During slumps, like after the financial crisis, Beijing has stepped in to support domestic producers.
As a strategic reserve, copper stocks are a state secret.
But Reuters hazarded a guess, estimated China’s copper stocks may be “in excess of 2 million tons.”
Reuters suggests it is doubtful China will release much, if any, net copper. More likely, cycling of old stock for new could be presented as sales.
However, as the activities of the reserve are secret, it would be difficult to judge one way or the other.
What about aluminum?
More transparent are those base metals not considered strategic, such as aluminum.
Again, Reuters suggests stocks are modest, in the region of about a million tons. However, the Financial Times estimates they are around 1.5 million tons.
Either way, at best only part, if any, would actually be sold. No hard figures have been given at all yet. So, this could be an effort to simply dampen expectations of further rises by threatening the additional supply of metal to the market.
Not all the rises have been speculative.
The aluminum market has been constrained recently, as smelters in Inner Mongolia faced energy efficiency restrictions. Furthermore, drought in Yunnan, a province largely dependent on hydropower, has impacted smelters there.
But whether the market can continue at elevated price levels depends in part on an alternative government policy to reduce carbon emissions to zero by 2060.
A long-term policy that is already being interpreted as a curtailment of new coal-fired power production – the favored power generation fuel for China’s low-cost aluminum producers – and rising restrictions on existing producers.
Beijing’s actions may need to be no more than a stopgap, according to Capital Economics.
After seven months of rapid growth, China’s economy recently slowed sharply. While still positive, growth in output rose just 0.5% in May. That marked its slowest pace since the pandemic hit last year, Capital Economic reported.
Growth is still solid. However, industrial production and exports are slowing while domestic consumption is picking up. That means demand will likely be, relatively speaking, less metals-intensive.
Have we seen peak metals prices for this year (in this case, specifically for base metals)?
We wouldn’t suggest that. If there is one takeaway from the last 18 months, it is to expect the unexpected.
But on a balance of probabilities, aluminum, at least, could be stable to softer in the second half of the year based on top consumer China’s likely demand.
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