Industrial Metals Monitor - June 2015

Industrial Metals Monitor China weakness hits metal prices

Group Economics Casper Burgering casper.burgering@nl.abnamro.com

June 2015   

Chinese demand is slowing down and import volumes for most industrial metals are levelling off Uncertainty over demand from China and the Chinese economy going forward is depressing prices However, low metal prices may bolster consumer confidence and increase end-user buying appetite

Figure 1: Growth emerging Asia still resilient

‘The Good, the Bad and the Ugly’.

Source: ABN AMRO Group Economics

The good news is that the European economy is set to expand going forward (on cheap oil, weak euro and ECB stimulus). Admittedly, from a historical perspective, the pace of growth is still quite modest and below pre-crisis levels. However, with increasing retail sales, rising manufacturing output and unemployment levelling off, sentiment is up. The bad news is coming from China, the world’s biggest industrial metals consumer.

Although growth in Emerging Asia is set to stay resilient, China’s economy is slowing down. Weakness in Chinese trade data, worrisome property markets and relatively low manufacturing activity confirm the vulnerable state of the Chinese economy. And alongside the slowdown of the Chinese economy, demand for industrial metals is also expected to slow. The dark cloud on the horizon is the possible Fed rate hike later this year, which will turn market sentiment ugly. Higher US rates will decrease liquidity outside the US, negatively impacting metal demand.

Figure 2: Import trend China flat in Q1 2015

Industrial metal import into China levelling off The appreciation of the yuan was not very helpful for Chinese export activity in Q1 and early Q2, particularly for exports to Europe and Japan. Total Chinese exports contracted in April by 6.4% yoy. Meanwhile, for the sixth consecutive month, growth of total imports into China was negative, with import volumes of most industrial metals also levelling off. Chinese imports of iron ore, the most imported industrial mineral by volume, were down in May by 8% yoy and the total import volume of iron ore to May was down by 1% yoy. In fact, imports of almost all industrial metals were down in the first few months of this year. The exceptions are copper ore (+13% to May) and bauxite (+1% to April). All in all, the numbers show that alongside the cooling of the Chinese economy, demand for industrial metals is also being hit hard. And this slowdown in demand in early 2015 has added to the price pressure for industrial metals.

Source: Thomson Reuters Datastream

Price pressure increased on strong dollar, weak demand Figure 3: Industrial metals price under pressure

Source: Thomson Reuters Datastream

Besides the decrease in import demand from China and uncertainty over the Chinese economy (and hence metal demand) going forward, industrial metal prices were also under pressure from the stronger dollar. As a result, industrial metal prices remain subdued compared to the start of 2015, with heavy losses in the ferrous industry (steel, iron ore and coking coal) and the nickel market. But fundamentals also played their part. The nickel price has drifted to lows on increasing stocks and weak (stainless steel) demand.

Copper demand has disappointed so far and aluminium oversupply is still overhanging the market, while China is increasing its aluminium exports.

Until now, zinc has been the metal with the least poor price performance.

This is because zinc supply tightness is expected in H2, due to the closure of some mines in Australia later this year. From May onward, the iron ore market started to show some revival on higher physical trades globally. But the main concern is that underlying steel demand has shown no significant gains recently and the question remains whether the iron ore rally is sustainable.

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Industrial Metals Monitor - China weakness hits metal prices - June 2015

Figure 4: Current weak aluminium fundamentals

Conditions depressed by China’s excess aluminium supply

Source: Metal Bulletin, Thomson Reuters Datastream

The aluminium price reached USD 1,653/t on 19 June, its lowest point so far this year. Up to 19 June, the average price is USD 1,792/t. Currently aluminium market sentiment is weak. Besides the overcapacity and the high inventory overhang, the Chinese decision to cut an export tax on some aluminium products did nothing to improve market conditions. As a result, China’s domestic oversupply will be reduced, but internationally supply is set to increase further, putting more pressure on prices. LME stocks are decreasing steadily, and at the current price level about half of all aluminium capacity is loss-making. A fresh round of capacity cuts should bring more balance to the market. In addition, the current low price and decreasing premiums (for immediate delivery) should bolster consumer confidence. We think a price recovery in H2 2015 is on the cards and our price goal for 2015 is USD 1,875/t.

Figure 5: China copper ore imports accelerated

Rise in copper concentrate imports into China The copper price is struggling. On 5 May it reached its 2015 high of USD 6,482/t and has trended lower since then. In this period, dollar strength had the upper hand in price movements, accompanied by worries about the health of the Chinese economy and the level of demand from China going forward. The weaker demand outlook was also influenced by the continued slowdown in Chinese investments in the construction sector and new residential property in Q2. All this was confirmed by disappointing Chinese import demand for copper materials in H1 (such as refined, scrap, anodes and products). Total imported volumes of copper ore to May, on the other hand, increased by 13% yoy. We think prices for copper should revive in H2.

Despite a further strengthening of the dollar this year (adding pressure), demand conditions will improve due to the positive global macroeconomic outlook and more buying appetite from the end-user sector.

Source: Metal Bulletin, Thomson Reuters Datastream

Weak Chinese steel demand and pressure from oversupply Figure 6: China steel production stable

Source: Thomson Reuters Datastream

Steel prices in Europe have fallen by only 8% on average since the start of this year. But in other regions prices suffered more extensive losses. CIS steel prices slipped by 18%, while prices in China, Latin America and the US decreased by more than 20%. Poor market sentiment and weak demand are mainly due to a global oversupply of steel. But increasing Chinese exports are the factor really depressing market sentiment. Excess steel material from China is flooding markets abroad and some markets have already introduced import measures to halt this relatively cheap inflow of Chinese steel, while others are considering doing so. Europe took protective measures on cold rolled stainless steel products from China, but also from Russia. A more stable EU market will be the result going forward. In the US, meanwhile, the International Trade Commission is currently investigating whether imports of coated products have damaged domestic market conditions, which could lead to import duties going forward.

Level of iron ore demand unable to absorb current supply Figure 7: China iron ore output down, imports up

Source: CRU, Thomson Reuters Datastream

Although the iron ore market is still plagued by oversupply, prices staged a recovery on increased trades and sentiment in the market. But from a fundamental point of view there is little reason for optimism about even stronger price gains in H2. Imported volumes of iron ore into China, the world’s biggest consumer, were 1% lower from January to May compared to the same period in 2014. In addition, iron ore output in China decreased by 13% in the same period. The drop in iron imports and output can be attributed to the lower crude steel output, which decreased by 2% up to May. The June import volume could revive, as high cost (low quality) domestic output is replaced by (higher quality) imports. However, demand for steel from construction sectors, the biggest steel end-user, remains subdued. Steel demand from the automotive sector, on the other hand, is faring relatively well on a global scale, but the level is not sufficient to make up for the lack of demand in construction sectors.

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Industrial Metals Monitor - China weakness hits metal prices - June 2015

ABN AMRO Group Economics Casper Burgering Senior sector economist – Manufacturing Sector & Industrial Metals Phone: +31 20 383 26 93 casper.burgering@nl.abnamro.com All publications of ABN AMRO on macro-economics and sector developments can be found on: insights.abnamro.nl/en. Follow Group Economics on Twitter: https://twitter.com/abnamroeconomen

Disclaimer Last editing of this publication on 22 June 2015.

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