Picture: REUTERS
Picture: REUTERS

Sydney — All good things must come to an end — and the great metals rally of 2017 is no exception.

Prices of key industrial metals on the Shanghai Futures Exchange slumped on Wednesday, for no very obvious reason other than profit-taking.

Regulators have been trying to take the heat out of zinc, steel rebar and coking coal contracts over the past week, but those moves don’t seem to quite match the timing of Wednesday’s sell-off. Besides, the irrational exuberance of China’s commodity speculators has historically tended to be a better guide than the considered opinions of wiser heads.

A retreat, however, is long overdue. As Gadfly has argued previously, the price rises of the past six months have been built on unstable foundations. The only sustainable path to rising prices in the long term is demand growth, but that’s been curiously lacking in this boom.

On a trailing 12-month basis, global copper demand has been essentially flat for 18 months at about 23-million tonnes. Zinc, another standout performer, has gone sideways at the 14-million tonne level, while nickel is in outright decline after holding above 1.8-million tonnes a year since early 2016.

The infrastructure boomlet underway in China in the run-up to the communist party congress later this year has added a hint of demand strength in recent months — but the fact that it’s not succeeded in reversing the overall global picture is an indicator of just how weak things are around the world. Since last September, global copper demand has only risen year-on-year in March and May, Bloomberg Intelligence data show.

What has been sustaining prices, then? Largely the supply side: strikes at Andean copper mines, regulatory chaos around Southeast Asian nickel pits, or the likes of Glencore deciding to starve the market by running its Australian zinc operations below capacity.

These benefits can be dangerously short-lived. Supply that’s temporarily removed from the market can rush back, especially with the sorts of prices we’ve been seeing of late. Projects that weren’t even contemplated move toward production, further loosening the market.

The great unknown remains how China will perform in 2018. The revival of heavy industry has restored the fortunes of mining companies worldwide over the past 18 months, but the boom has been built on a mountain of debt that must, at some point, get paid off.

The current vogue for debt-for-equity swaps may not be helping matters much: instead of rebuilding balance sheets in the construction, manufacturing and infrastructure sectors that consume industrial metals, more than half of the swaps have gone to shoring up steel and coal producers.

This risks keeping less sustainable suppliers in business at a time when, by rights, they should be shuttered. Those fears also go some way to explaining the steel-ish taste of Wednesday’s sell-off, which was most pronounced in rebar, hot-rolled coil and the raw materials of iron ore and coking coal.

At least until the party congress is over and winter smog starts spreading over northern China, the country’s smokestack industries can count on government stimulus to keep prices elevated.

As a result, Wednesday’s slip probably won’t turn into an outright landslide, but traders dizzied by the past year’s price rises would do well to pause for breath. The air is pretty thin up here.

Fickling is a Bloomberg Gadfly columnist covering commodities as well as industrial and consumer companies. This column does not necessarily reflect the opinion of Bloomberg LP and/or its owners.


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