Surging industrial metal prices appear to be a case of ‘hyped’ expectations, analysts say

PUBLISHED : Sunday, 13 March, 2016, 5:01pm
UPDATED : Sunday, 13 March, 2016, 5:00pm

Beijing’s renewed emphasis on infrastructure investment will help boost industrial metals demand this year, but the recent price rally has gone ahead of fundamentals of an industry that needs to go through consolidation and excess capacity curtailment, according to analysts.

“Early indications suggest that this technical rally has got ahead of the fundamentals … there are still significant headwinds for industrial metal prices,” Societe Generale’s head of metals research, Robin Bhar, said in a report.

We consider the recent rally in industrial metals’ prices to have been driven mainly by sentiment [in terms of] easing risk aversion and short positions covering
Robin Bhar, Societe Generale

“We consider the recent rally in industrial metals’ prices to have been driven mainly by sentiment [in terms of] easing risk aversion and short positions covering rather than any significant improvement in underlying fundamentals.”

Beijing is targeting annual economic growth of at least 6.5 per cent for the next five years, with this year’s fixed asset investment growth targeted at 10.5 per cent, up from 9.8 per cent last year, according to a report released by policy planner National Development and Reform Commission during the National People’s Congress last week.

Beijing’s economic development blueprint for the five years to 2020 targets the nation’s high-speed rail network at 30,000 kilometres, up from 19,000 km at the end of last year, and linking more than 80 per cent of the nation’s large cities.

Overall railway investment for the five years is budgeted at 800 billion yuan (HK$953.9 billion), while that for highways has been planned at 1.65 trillion yuan, according to Premier Li Keqiang’s government work report.

Together with water supply, hydro and nuclear power plants, ultra-high capacity and smart power grids, as well as oil and gas pipelines, a total spending of 500 billion yuan has been budgeted for 2016, up 4.7 per cent from 477.6 billion yuan planned for last year.

Spurred by speculation and later confirmation of policies to support the slowing economy, iron ore prices jumped almost 28 per cent between February 26 and March 9. China’s annual political advisory meeting opened on March 3, with the annual meeting of the National People’s Congress opening two days later. Copper gained 8.6 per cent, while aluminium rose 2.5 per cent and zinc climbed 4.7 per cent.

Analysts at Canadian brokerage RBC said they do not believe the rally, driven by higher steel prices, credit easing and speculation of economic stimulus in China, is sustainable, unless there is a “dramatic improvement in steel fundamentals.”

Analysts are sceptical new demand from Beijing’s infrastructure policies can push prices higher, as homes construction, which dominates fixed assets investments, continues to languish amid major oversupply in smaller cities.

Property construction accounts for over 40 per cent of mainland China’s steel demand.

Paul Bartholomew, senior managing editor at commodities data provider Platts, forecast China’s crude steel output to fall 2.5 per cent this year amid weak domestic demand and a lack of growth in exports due to rising trade barriers abroad.

Analysts at UBS warned that speculation of the economic stimulus’ impact on commodities demand could turn out disappointing.

The recent metals price rally was likely caused by traders’ positioning ahead of the seasonal ramp-up in demand in the second-quarter, which is normally followed by a slow-down in the rest of the year, they said.

“Firmer economic growth will be a positive for commodities demand, a clearer path to more infrastructure construction would also boost demand,” UBS analysts said. “But we are not yet convinced, as additional stimulus might yet favour service [and] consumer sectors.”

“Data to the end of [last year] fails to show broad evidence of accelerating [construction] supporting broader fixed asset investment yet … evidence of accelerating infrastructure construction is needed to legitimise hyped market expectations.”