Metal prices fall on Monday on weak Chinese data

On 15th August, even as Indian markets were shut to commemorate the 75ths Independence Day, the world markets were in for a rude shock. Chinese stocks took a beating in early trades on weaker than expected economic data. In the last few months, China has gone aggressive on curbing the spread of COVID with rigorous lockdowns across major commercial hubs like Shanghai and Beijing. The result was that factory and retail activity in China for the month of July 2022 slowed sharply. 

If there was one reason the markets managed to cut losses on Monday and actually close gains, it was largely thanks to the PBOC. The People’s Bank of China (PBOC), the central bank of China, cut the benchmark rates for the second time in the year 2022, to give a boost to credit traction and to industrial growth. However, a spokesman for the National Bureau of Statistics, in China, was quite confident that the Chinese economy would continue to recover gradually and the employment situation would also stabilize soon.

For the month of July 2022, a slew of data points were fairly disappointing. For instance, the key activity indicators ranging from industrial output to retail sales missed the forecasts by a fairly elaborate margin. Even as China refuses to yield on its zero-COVID policy, it surely taking a toll on growth across segments. However, as usual, China plans to export its way out of an economic straitjacket. China is already the world’s second largest producer of refined fuels. China 2022 diesel and gasoline exports could be 40% lower than in 2021.

The red flags were seen number of sectors. For example, July refiners runs in China fell to the lowest in 2 years with volumes down by 6.3% yoy. Similarly, the July crude steel output was also lower by 6.4% on a yoy basis. Its crude steel output in June 2022 stood at just 81.43 million tonnes of steel, compared to 90.73 million tonnes of steel produced in 2021. This lower output is likely to result in lower demand for steel and other infrastructure product inputs and that can be slightly sticky since the world still relies on Chinese supply chains.

However, there is some room for hope too on the China story. For instance, the US is likely to shortly roll out its massive $2.5 trillion infrastructure package. That is going to translate into a lot of fresh order flows into China too. In addition, the PBOC has tried to facilitate the recovery by offering the second rate cut in this year, even as the output numbers have been disappointing in China. The central bank wants to stay dovish and provide an environment that is conducive to the recovery in the economy overall. 

Whether the metals can bounce or not will largely be contingent on how soon the United States prepares to roll out its $2.5 trillion infrastructure package. With a series of cases like Evergrande, there is a serious problem that the Chinese housing market faces. However, the story is about the US and China, as both try to grow with a thrust on infrastructure sector. China’s construction sector grew at 4% in 2020, 2% in 2021 and it is expected to grow at 4% annualized. The world would surely be watching with bated breath as they face-off.