CLYDE RUSSELL: Sluggish industrial metals despite Chinese stimulus reflect downbeat sentiment

Launceston, Australia — It's perhaps instructive of market sentiment in China that reports of a huge stimulus package barely shifted the prices of key industrial metals.

Iron ore, steel, copper and aluminium all ticked a little higher after a July 7 Bloomberg News report said Beijing was considering a plan to allow local governments to sell 1.5-trillion yuan of special bonds in the second half of this year.

If the new bonds are issued, they will take available funding to levels similar to the stimulus that helped drive the recovery from the initial Covid-19 outbreak in 2020. This is a time-honoured strategy of lifting infrastructure and construction spending to boost the economy.

China is also set to revive an infrastructure investment fund worth ¥500bn in the third quarter, two people with knowledge of the matter said last week.

The reports of more stimulus spending have been accompanied by top-level words, with Premier Li Keqiang quoted in state media last week as saying the economic recovery was not solid and more efforts were needed.

While the playbook of rolling out infrastructure spending may be familiar, what's different this time is the apparent scepticism of market participants.

It would be a challenge to find an analyst who thinks China is on track to meet its 5.5% annual economic growth target, and there are doubts about whether enough stimulus can be applied at a pace fast enough.

The inflation breakout in the Western world and its accompanying interest rate hikes have also led to fears that China's export-orientated economy will suffer as many countries slide into recession, or at least towards much slower growth.

News of the renewed stimulus did lift the spot price of iron ore slightly, with benchmark 62% ore for delivery to north China, as assessed by commodity price reporting agency Argus, rising 3.4% to $115.30 a tonne on July 7.

However, it subsequently slipped back to $114.15 a tonne on July 8 and is down 29% from its 2022 peak of $160.30. The peak was reached on March 8 in the wake of supply concerns after Russia's February 24 invasion of Ukraine, the world's fifth-biggest exporter of the steel raw material.

China's domestic iron ore futures showed a similar pattern to the spot price, gaining 5.2% on July 7, before dropping again to trade little-changed around 733 yuan a tonne early on Monday in Asia.

Aluminium futures

Shanghai steel rebar contracts saw a small, 1.1% bounce on July 7 but have since dropped 4.8% to ¥4,023 a tonne in early Asian trade on Monday, while copper futures were also down 2% in early trade.

Aluminium futures were at ¥18,205 a tonne early on Monday, which was down 1.6% from the close on July 8 and the weakest since April 2021.

Aluminium is now trading very close to the ¥18,000 a tonne level that sector specialists AZ Global Consulting say is the all-up cost of production, meaning producers are barely making a profit and raising the risk of output curtailments.

Overall, the picture from key industrial metals is that the stimulus that is likely to be rolled out isn't enough to spark a price rally, and that the demand outlook is still far from rosy.

With Shanghai reporting 63 new Covid-19 cases on July 10, up from 52 a day earlier, the risk of renewed lockdowns under Beijing's strict zero-Covid-19 strategy is also likely to dampen any enthusiasm in metals markets.

Confidence in China's economic momentum is ebbing away, and it will likely take stronger action from Beijing to restore it.

Reuters