Chinese demand weakens – steel, aluminum, copper, stainless steel, rare earths, metal prices, forecast

The bears are back in the metals markets, and one of their main motivations is this year’s bleak outlook for China. A note in the FT’s Unhedged today explored the country’s ‘impossible trilemma’ of achieving 5.5% GDP growth, achieving a stable debt-to-GDP ratio and meeting zero COVID initiatives. When you combine that with the reality that Chinese demand is already weakening, you have a real recipe for disaster.

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The article also mentioned how the typical “get out of prison card” would not work for China. This typically involves pouring debt into low-productivity real estate and infrastructure projects. However, this will destroy their debt to GDP growth limits. It would also be futile given the ongoing zero-COVID lockdowns, which are expected to cover some 300 million people. After all, who is going to buy a new house if they are locked in their current house?

Destina/Adobe Stock

Dismal figures and little optimism

The April data was, to quote the FT, “horrifying”:

  • Retail sales fell 11% from a year earlier, compared to an expected drop of less than 7%
  • Industrial production fell 2.9%.
  • The manufacturing sector was particularly weak, with auto production falling 41%.
  • Export growth was 4%, a sharp slowdown from 15% growth in March.
  • Real estate activity collapsed, with new construction falling by 44%.

On top of all this, credit growth has stubbornly refused to accelerate. It should be noted that this is despite policy measures such as the reduction in bank reserve requirements last month. Meanwhile, loans to households are falling, medium and long-term loans to businesses are falling, and the issuance of government bonds is slowing. All of this points to a decline in investment and activity.

China’s extremely strict zero COVID policies are finally showing signs of reducing infection rates. And although Shanghai has announced that it will start easing restrictions, major changes are unlikely to take place before the fall presidential elections. For this reason, consumer and business spending can be expected to remain cautious (and growth to remain tepid).

With falling Chinese demand, exports are up sharply

Overall, it’s no wonder that investors’ view of metal demand is pessimistic. While China’s metal production has rebounded strongly after last year’s electricity curbs, demand has not. As a recent Reuters report indicates, the metal is moving out of the country at an unprecedented rate.

Indeed, exports of all metals have increased significantly this year. Even in the case of metals like copper and nickel, where China remains a net importer, the net import ratio has declined.

  • In March, China exported 45,260 tons of primary aluminum. This represents the highest monthly total since April 2010, despite a 15% export tax.
  • Simultaneously, exports of semi-finished metals surged. With weak demand in the domestic market and most Chinese factories on short-term runs, the outflow increased by 18% to 5.5 million tons last year. In the first quarter of this year, this figure added another 23%.
  • Refined lead exports also increased to 98,000 tonnes last year and 38,000 tonnes in the first three months of 2022 alone.
  • Even zinc exports are on the rise. As with aluminium, this despite a 15% export tax due to its high energy content. In fact, export numbers for the first quarter of this year were more than double what we’ve seen throughout 2021.

These rising export levels are only possible because domestic prices for primary and semi-finished products in China are lower than those in the rest of the world. Why are they lower? Because the demand is less. This can be good for consumers benefiting from supply in an otherwise limited global market. However, this does not reflect China’s growth prospects, especially when the rest of the world is doing relatively well.

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