Base metal prices are consolidating, nicely

Spot base metal prices (i.e., copper, nickel, aluminium, etc) for manufacturing, industrial processes, electrification and green transition have been consolidating.

They’ve been steadily printing 2% to 3% month on month price increases (in SDR terms) since November.

Still lots to claw back after the rout between April and July 2022, but steady as she goes so far.

And a quick check of the data for China manufacturing (which requires more base metals than bulks) shows that while producer prices were lower at 48.7, raw material PPI increased at just under 5%, also confirming a similar price trend.

Productivity expectations were also up, which probably means internal consumption expectations are as well.

China data also revealed that raw material inventories increased by around 5%, employment was on the up, and raw material supplier delivery times decreased significantly (by around 18%).

We might see continued price consolidation as manufacturing recovers, and an increasing supply of manufactured goods is consistent with President’s Xi focus on internal consumption versus exports.

But bulks were a slightly different story

For steal making and energy bulks (iron ore and the coal complex), prices did grow, but the growth slowed significantly after the 10% acceleration in December.

While the word from China insiders was “warning, massive China reopening ahead” the price growth in bulks increased at only 1/3rd of the pace of the previous month.

That does not bode well for the construction industry, despite the gains and consolidation in manufacturing discussed above.

But it’s consistent with China’s troubled real estate market which is still tending below threshold.

China’s construction (and real estate sector) PMI data reveals that raw material inventories improved at a rate of over 5% and delivery times reduced with around a 1% improvement in the sub-index.

And while according to the below we see rail and air transportation, postal service monetary, financial and insurance services printing above average in the “boom” bucket, real estate was in the “bust” bucket and this is consistent with lower expected steel demand and construction.

Less pressure on iron ore and coking coal prices, perhaps.

See below.

But, who knows, perhaps manufacturing leads construction and things might improve in February or Q2?

So, what does it mean for you and me downunder?

It seems like what we are seeing from China’s reopening so far is less demand for construction (internal capital expansion) and instead, a quietly improving manufacturing sector (for consumption) on top of an already raging services sector (consumption).

It feels like base metal prices which are consolidating but not yet breaking out (probably because of easing supply chains) are an expression of Xi’s new social contract to appease citizens.

So, will base metals become the fuel for President Xi’s new people’s opiate? Maybe. And while a fully open China with years of pent-up demand is a tantalising prospect and may not be as inflationary as first thought due to supply chain easing, the effect on commodity prices and Australia’s fortunes will come down to where (which sectors) President Xi decides to focus his factors of production, i.e., social contract consumption (manufacturing/base metals) vs. capital investment and real estate (construction/steel making bulks).

See you in the market.

Mike