EasyAssetManagement shares the latest economic data from China is a story of two sides for the base metals market. While overall growth seems to be picking up steam, with both industrial production and retail sales showing some positive signs, the real estate sector remains a major downer. Property investment and prices keep falling, suggesting that metals heavily relied upon in construction, like copper and steel, won't see a significant price increase anytime soon. So, buckle up for a mixed bag in the base metals market – some sectors might see a boost, but construction-related metals are likely to stay flat for the time being.
China's steel industry is flexing its muscles, hitting its highest production level in over a year. This might sound good for zinc, a key steelmaking ingredient, but hold on. China's real estate woes continue, casting a shadow on domestic demand for steel. The real driver behind this surge seems to be foreign buyers snapping up Chinese steel.
The story's similar for aluminium. Production reached record highs in May, fuelled in part by rising imports. While this suggests strong internal demand, China's shaky economic recovery makes it a gamble. If production stays high, expect a flood of aluminium exports, just like we saw in May – the highest level since mid-2022. So, the takeaway for the base metals market? Be cautious – China's booming production might not translate to a domestic boom after all.
China's booming exports of steel and aluminium are raising eyebrows, especially considering the ongoing trade spats with the West. These metals have already been slapped with tariffs, and a further export surge could trigger even tighter restrictions from the US and EU. This makes cranking up production even more risky, especially with China's weak domestic economy. There's another wrinkle: these industries are major polluters, and the Chinese government wants to rein in emissions. So, while China's production is currently strong, we don't expect it to keep climbing. This is bad news for aluminium prices in particular, which could face additional headwinds. 
Aluminium prices could be headed for a jolt if the EU joins the US and UK in tightening sanctions on Russian metals. G7 nations are pushing to choke off Russia's metal revenue, and while the EU hasn't taken a broad approach yet (likely due to their reliance on Russian imports), the winds are shifting. Just like with energy, the long-term goal seems to be weaning off Russia completely, unless the war in Ukraine ends. The good news? Europe's dependence might not be as bad as first thought. Import data suggests a significant drop – almost halving – in Russian aluminium coming into the EU between 2022 and 2023. Industry reports also show a similar trend, with Russia's share of aluminium imports plummeting from 25% to just 8% in the first quarter of 2024. So, even without stricter sanctions, Europe might already be on track to source its aluminium elsewhere. This shift, however, could create supply issues in the West, putting upward pressure on aluminium prices.
While global aluminium production is strong, the picture in Europe isn't so rosy. Despite this abundance, European companies are struggling to find alternative suppliers to replace sanctioned Russian metal. This is driving up "physical aluminium premiums," which essentially reflect the extra cost companies are willing to pay to get their hands on the metal.
The good news? There are potential replacements. Producers in the Gulf region and parts of Asia have ramped up production in recent years and could fill the gap. But there's a catch: US companies facing similar trade restrictions are likely eyeing these same suppliers. This competition for a limited pool of aluminium, coupled with declining US production, could push aluminium prices higher in the coming months. So, keep an eye on this situation – it could get bumpy for aluminium consumers.
So, in China what is Easy Asset Management doing? Globally we have not invested in any Chinese companies. In SA we have invested in Naspers but that’s a China consumer story not industrial production, although it is related. Our South African holding in BHP is purely a play on copper. BHP is currently the world's second-largest producer, and on the cusp of becoming number one globally.
China's Economic Data Points to Q2 Weakness and Need for Policy Support
China's economic data for May paints a concerning picture of a weakening economy in the second quarter (Q2) of 2024. Several key indicators missed market expectations and point to a slowdown in growth momentum.
Demand Side Struggles:
- Property Slump: The ongoing slump in the property market continues to weigh heavily on the economy. New housing sales, especially in lower-tier cities, deteriorated further, indicating that recently introduced easing policies may take time to have a positive impact.
- Fixed Asset Investment (FAI) Moderates: FAI growth moderated due to headwinds from both the property slump and infrastructure investment. The property downturn is impacting investment, while local government fiscal strain is hindering infrastructure spending.
- Consumer Spending Sees Modest Recovery: Retail sales showed a slight rebound, driven by essential goods like food and home appliances. However, continued weakness in the property market and persistent deflationary pressures are dampening overall consumer demand.
- Manufacturing Investment and Production Remain Strong: Despite the demand-side weakness, manufacturing investment and industrial production continue to demonstrate resilience. This suggests that the supply side of the economy remains relatively robust.
Given the concerning economic data, further policy support measures are anticipated in the second half of 2024 (2H24). The potential actions include:
- People's Bank of China (PBOC) Policy Adjustments: The PBOC may cut Loan Prime Rates (LPRs) by 10-20 basis points to alleviate the debt burden for consumers and private businesses. Additionally, they may reduce deposit rates to protect banks' Net Interest Margins (NIMs).
- Fiscal Stimulus: The central government may accelerate bond issuance and increase fiscal spending to stimulate aggregate demand.
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