China's Economic Challenges Impacting Industrial Metals

China concerns weigh on industrial metals

It has been a summer of downward pressure for most metals. Renewed strength in the US dollar and a growing view that maybe the Fed has more work to do when it comes to monetary tightening has provided some strong headwinds to the metals complex.

However, it is weakness in China which has been the key catalyst for the sell-off seen in most metals. The property sector remains weak, with housing starts and residential floor space sold still in deep contraction, whilst new home prices have started falling once again month-on-month. In addition, China’s manufacturing PMI remains in contraction territory. These are two important sectors for metals demand which are clearly struggling. Meanwhile, retail sales in China, which helped to support growth earlier in the year, are also weakening. Metal markets are likely to continue to be largely dictated by developments in China. However, it is difficult to see a swift recovery in China’s property sector.

A number of base metal markets also appear to be more comfortable in terms of supply, at least in the prompt market. This is evident with the cash/3M spreads for aluminium, copper and zinc having all weakened recently and trading in contango. In addition, these three metals have seen inventory levels in LME warehouses growing over at least the last month.