Rising supply of late-cycle commodities, including copper and
aluminum, together with uncertain Chinese demand may continue to weigh on metal prices this year.
3. 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.
5. 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.
6.
7. When and how could the bull cycle for metal prices come again?
8. 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.
9.
10. China likely to increase capacity for late-cycle commodities
11. 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.
14. 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.
17. 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.
18.
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