How long will industrial metals rally last?

Even as the world struggles to cope with the pandemic’s adverse effects including slowing economic activity, China is turning out to be a beacon of hope for the global growth prospects.

Latest data point to a broad-based improvement in the Chinese economy — production, demand and export-import trade — even as policy stimulus continues to boost investment and industrial output. Not just that, revival of growth in real retail sales and services activity has returned to pre-Covid levels, according to reports.

China was the first major economy impacted by the pandemic back in December 2019 and faced slowdown in activity in the first quarter of 2020. After gaining some growth momentum in the second quarter, the third quarter witnessed rapid acceleration in the Chinese economic activity including construction.

Sharp rebound

In addition to the ultra-accommodative monetary policy (very low interest rates, massive liquidity infusion) adopted by major western economies and weaker dollar, one significant reason for industrial metal prices to rally in recent weeks is the sharp rebound in the Chinese economy. The ongoing fiscal stimulus means China’s commodity import volumes will be robust to meet the ravenous demand.

The multi-million dollar question is how long the rally in industrial metals will last? While China’s stimulus has been driving the market with large investment and industrial output, the rest of the world is still struggling, with some countries imposing renewed lockdown measures. This is sure to mute the growth in demand for industrial metals. However, there are limits to which China alone can continue to spur the metals market. The rate of growth in Chinese activity will slow probably from the second half of 2021 as the positive effect of the stimulus package begin to fade. This will weigh on infrastructure spending and impact construction-specific metals such as steel and copper.

However, a more important reason is the recent declaration by the Chinese government of moving towards self-sufficiency. While details will be available by March 2021, there is widespread expectation of policies to boost domestic production so that import dependence is reduced. Indeed, many smelters have already begun to upgrade facilities, which is sure to boost domestic output.

So, it would be reasonable to expect that while China’s import demand will continue to stay at elevated levels until the second quarter of 2021, demand growth may begin to slow in the second half of the year with the fading of stimulus effects. It will surely weigh on the metals market prices in the months ahead. On current reckoning, it appears less likely that demand in the rest of the world – mainly developed economies – will be able to prevent a price correction.

The writer is a policy commentator and commodities market specialist. Views are personal