Channel checks in China’s metal markets

Yi Zhu, Manshu Deng and Kenneth HoffmanBloomberg Intelligence analysts

Chinese metal prices likely to remain weak amid rising supply

Rising supply of late-cycle commodities, including copper and aluminum, together with uncertain Chinese demand may continue to weigh on metal prices this year. Government-announced infrastructure projects have yet to translate to more demand for metal.

The bear cycle for metals may last until the industry has significant capacity cuts or a strong recovery in demand. BI conducts periodic channel checks with local traders, producers and their downstream customers to track market movements.

Metal price rebound in 2016 may not last, based on fundamentals

Prices for metals including iron ore, gold and copper have rebounded since the beginning of the year, mainly on short-covering, seasonal factors and speculation that China’s demand will recover. Further price rebounds, however, still lack fundamental supports such as significant supply cuts and clear evidence that downstream demand is improving. Macro data have picked up in the first two months, which may translate into demand for metals if the upward trend lasts for another couple of months.

March and April are usually strong months for metal demand as construction sites and other infrastructure projects return to normal operation with the end of Chinese New Year and the beginning of warmer weather.

When and how could the bull cycle for metal prices come again?

The current bear cycle for metals should continue until fundamentals show signs of improvement. The 10-year bull cycle ended in 2012. Fundamental factors for metals are supply and demand, so ending the bear cycle will require meaningful supply cuts and a strong recovery in demand.

While supply cuts have been implemented in certain metals such as steel, the reductions are still far from enough to alleviate the oversupply. Any demand rebound, meanwhile, is unclear amid China’s slower economic growth.

China likely to increase capacity for late-cycle commodities

China’s investment in late-cycle commodities such as base metals peaked last year, tracking early-cycle commodities such as steel. There is a time frame of two to three years between the peaks for fixed-asset investment and capacity.

Expansion of capacity for base metals used in the latter stages of the construction cycle may continue, while steel capacity already peaked in 2014. China plans to add 3 million tons of capacity for aluminum this year and 400,000 tons for copper, according to BI analysis.

China may continue cutting steel capacity after peak in 2014

Overcapacity in China’s steel industry may continue to ease this year as fewer new plants come online. Steelmakers are also eliminating facilities that fail to make money or meet environmental standards. The country will cut 10 million tons of capacity in 2016, according to BI analysis.

That compares with net additions of 20 million tons in 2014 and net reductions of 5 million tons last year. Capacity control is likely to be achieved if unprofitable plants are closed and approvals for new capacity remain strict.

China’s demand for metals still hanging on government projects

China announced plans last year to accelerate railway and other infrastructure projects, but that has yet to translate to more demand for metals, according to Bloomberg Intelligence channel checks with producers and traders.

Implementation of the projects probably hasn’t started, as metal producers are still waiting to receive orders. The NPC in March announced a batch of major projects for the 13th Five-Year plan ending 2020.

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