Base metal prices fall on PBOC rate rise leaving analysts with mixed views on outlook
Mining capex at lowest level in a decade, and lack of investment in new growth over past three years has left firms with limited ability to increase volumes
Base metal prices have been hit hard by China’s surprise interest rate rise, but analysts have mixed views on whether prices will rise later in the year as the country continues down its route of supply side reform.
The People’s Bank of China, the central bank, raised money market rates across the board on the first working day in the Year of the Rooster on Friday, after a week-long holiday for the Lunar New Year.
The seven-day repo rate, the major interest rate between the central bank and commercial banks in the interbank market, increased to 2.35 per cent on Friday from 2.25 per cent before the start of the holiday.
Commodities prices were hit hardest as the tightening of monetary policy in China has led to selling pressure across all types of base metal, according to Matt France, head of institutional sales, metals (Asia) at Marex Spectron, a UK based commodities broker.
“Those hoping that China would give us a boost at the start of the new lunar new year have been left very disappointed,” France said in a research note.
The PBOC rate rises have led Chinese commodities traders back to their trading rooms to sell, France said, with iron ore, rebar and coking coal all down 5.5 per cent to 7 per cent, while copper, nickel and zinc all tracked lower too, with more sellers then buyers.
“We saw a wave of aggressive selling across the commodities sector. To start a new year with such a move is significant, as they seem to be trying to target specifics asset ‘bubbles’ in housing and commodities,” he said.
“In the face of supply issues, I am inclined to think there are short-term trades to be made in owning after this initial dip, but as always it feels like catching a falling knife, initially at least,” France said.
A Goldman Sachs report, led by Craig Sinsbury, however expects commodities prices to rise this year.
China represent about 20 per cent of worldwide commodity output and is likely to continue with its supply-side reform this year to reduce domestic supply by removing marginal capacity, reforming state-owned enterprises to increase industry concentration, and restructure so-called zombie firms to improve the quality and efficiency of supply.
“We expect that reform to accelerate into 2017, resulting in greater likelihood of more supply-side disruptions from China.
“Aside from its continued, likely even-more intense focus on coal and steel supply-side reform, we expect China to extend reforms to cement and aluminium in 2017,” Sinsbury said in the report.
“If steel capacity curtailment overshoots, as coal did in 2016, we see a rising risk that China’s steel market may even experience a shortage in the first half of 2017. Also, potential aluminium capacity cuts should support its prices.”
And he adds western miners will be unable to pick up the slack.
“Mining capital expenditure among major miners is at its lowest level in a decade, and the lack of investment in new growth over the past three years has left them with limited ability to increase volumes at their mines to meet any shortfall in production from China,” Sinsbury said.
“We believe these two factors should support commodity prices remaining elevated for longer, assuming demand remains intact,” he added.
Goldman Sachs gives a “Buy” rating to a number of A- and H-share commodities stocks, including China Resources Cement, BBMG, Magang, and Angang Steel.