China's Metals Data Sending Confusing Messages

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Conflicting data is coming out of China, which doesn’t help metals consumers elsewhere trying to read the tea leaves on what impact the world’s top consumer and producer of steel and non-ferrous metals is likely to have on prices this year.

A Reuters article this week reports on how base metals demand is falling due to slower economic activity. Copper output in both January and February slumped to the lowest levels since the first quarter of 2011, the report stated, with February output at 437,000 tons, up only slightly from 433,000 tons in January, based on National Bureau of Statistics data. Likewise, zinc and lead output was slashed by around a third from December.

Yet perversely, steel production is rising. China’s daily crude steel runs reached 1.926 million tons in February (up from 1.83 million tons in January) as mills began ramping up operations ahead of a predicted recovery in demand in March and April.

The article notes an expectation that base metal prices will rise in the second quarter as — liberated by falling inflation — Beijing is expected to loosen credit, resulting in a surge in construction activity. This seems to be the steel producers’ position; namely, that as credit controls are relaxed, housing will benefit and construction will recover.

But such a position supposes that the only barrier to greater housing construction is a lack of bank lending. Unquestionably, as bank lending has significantly been curtailed as part of Beijing’s fight against inflation, the economy has moved on from the start of last year when the screws were tightened on a frothy and speculative property market. Property prices have dropped some 20 percent over the last 12 months and buyers are understandably stepping back from the market to see if prices fall further.

Under such circumstances, will builders rush into new construction projects simply on the back of easier credit?

Buyers’ concerns sure aren’t purely based on the possibility of lower property prices, the Telegraph reports this week. China recorded its largest trade deficit in more than two decades, as Europe’s sovereign debt crisis subdued exports and oil imports rocketed.

The country’s customs bureau said the shortfall was $31.5 billion, thought to be its biggest since at least 1989. Imports rose 39.6 percent from a year earlier, after a 15.3 percent slump in January, while exports increased 18.4 percent.

True, an earlier-than-usual Chinese New Year holiday distorted January figures, but this still suggests a number of factors are weighing on the economy, and by extension, consumers’ willingness to pile back into the property market. Beijing’s attempts to guide the economy away from exports and towards consumption is having some success, aided by a very slowly appreciating currency, but more by an appalling export market.

Steel- and base metal bulls’ faith in a construction-led upswing in Q2 may prove overdone. China certainly has room for credit loosening, but just as the tightening took a year to really take effect, the loosening could take some quarters to reverse, and Beijing will not want to relax controls too quickly.

The last thing they need in a year of major political transitions is to undo all the hard work of the outgoing team.


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