After drop in prices, Chinese demand for industrial metals likely to stabilise

As prices of ferrous and non-ferrous metals surged to multi-year highs in May this year, Chinese demand for these industrial metals dropped immediately. However, demand from the Communist nation will likely stabilise as prices have declined since then, two research firms have said.

According to Fitch Solutions Country Risk and Industrial Research (FSCRIR), China's domestic demand for industrial metals has begun to show signs of stabilisation after soaring in the first five months of the year.

Rise in construction activities

Though the research firm sees the demand easing in the months ahead, it does not expect any collapse in the current half as construction activities in China will continue. The pace of the activities may, however, be slower than the first half, it said.

Pointing to increased volatility in the metals markets over the last month, Dutch multi-national banking and financial services research firm ING Think said the Chinese government has attempted several times to cool down rising prices, with varying degrees of success.

“Part of this intervention includes cracking down on speculation within the domestic market, whilst also finally confirming the release of aluminium, copper and zinc from State reserves,” it said.

Metals’ behaviour

Over the past month, copper prices have dropped over 4.5 per cent, while gains in steel have been curbed to below one per cent. Prices of aluminium have declined by nearly one per cent and zinc rates, by a little over two per cent. Prices of iron ore and metals such as tin and nickel have increased marginally. However, the rates of all these are below the peaks seen in May.

ING Think said the Chinese impact on prices is likely to be short-lived as the market was underwhelmed with the volumes of metals the Chinese government offered in the first stock release.

Strong offtake

Fitch Solutions said the peaking of construction activities will result in stabilisation of demand for metals in China and offtake from the automobile and consumer electronics sectors will continue to be strong for the remaining part of the year.

“Our infrastructure team expects the Chinese construction industry to grow by 8.6 per cent year-on-year this year compared with a 3.2 per cent growth in 2020. In tandem with strong demand growth from the construction industry, demand from the autos, consumer electronics and home appliance sectors will also support metals demand,” it said.

On its justification of demand re-emerging for copper, ING Think said: “ If we look at China, copper cathode import premiums are at multi-year lows, with downstream buyers remaining on the sideline in this relatively higher price environment.”

FSCRIR said its automobiles team expects Chinese vehicle production to grow 18 per cent this year compared with last year, when the output dropped by 2.8 per cent.

Stimulus to slow down

With China’s fixed asset investment witnessing a cumulative growth, metals used in manufacturing, infrastructure and real estates would see strong demand growth this year, the Fitch research arm said.

Chinese demand for steel and iron ore peaked in the first half, but FSCRIR said it expects Beijing’s stimulus to infrastructure and construction to slow down the projects near completion. New projects, too, are not taking off, it added.

Chinese steel consumption will likely increase by 10.8 per cent this year compared with last year, while copper offtake would rise by 1.4 per cent year-on-year during 2021-25. The outlook on copper could, however, be raised, Fitch Solutions said.

ING Think said signs of copper market easing are visible with inventories on the London Metal Exchange rising significantly. As the market moves to surplus from deficit, demand will stabilise.

FSCRIR said prices of these industrial metals are likely to stabilise and remain at elevated levels compared with the previous year.