Copper, aluminium, other metals crash on Chinese Covid curbs

From copper to aluminium, nickel and zinc and from iron ore to steel, lead and cobalt, all metals have declined over the past couple of weeks over the Chinese lockdowns to curb the spread of Covid pandemic. This is because demand from the world’s largest consumer of metals has decreased, resulting in a negative sentiment in the market.

But the metals market is expected to recover once the Communist nation recovers from Covid, say analyst and research firms.

How metals have fallen

According to the Trading Economics Website, prices of copper have dropped by 9 per cent in the past month, aluminium by 14.5 per cent, nickel by 10 per cent, zinc by over 8.5 per cent, lead by 5.5 per cent and tin by over 5 per cent. 

Among other key metals, prices of lithium have slipped by 6.8 per cent, steel by almost one per cent, iron ore by 7.75 per cent and palladium by 7 per cent.

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“Metal prices have been under immense pressure of late due to lockdowns in the world’s largest metal consumer, China, that is impacting demand from end-use industries as well as sentiment towards the complex,” said US research agency Fitch Solutions Country Risk and Industry Research, a unit of the Fitch group. 

“The sentiment quickly deteriorated when China appeared to be falling into a wider and longer lockdown. We thought there would be snap lockdowns in Shanghai, similar to what had happened earlier in Shenzhen, which lasted only seven days. Instead, the city remains under lockdown as of early May. Even worse is that the capital city of Beijing has also fallen into partial lockdown, along with some other smaller cities in China,” said Wenyu Yao, senior commodities strategist at ING Think, the research and financial analysis wing of Dutch multinational financial services firm ING.

Demand destruction

Fears are mounting over demand destruction, which has been further reinforced by the latest macro data, including manufacturing PMI and property and car sales in China, she said.

Fitch Solutions said it expects further contractionary readings in both Chinese manufacturing and non-manufacturing PMI in the remaining two months of the current quarter, at least. 

“Further lockdowns, either district-wide or full, have been imposed in more than two dozen cities around the country, with the capital Beijing having undergone three rounds of mass testing since late April. We continue to see downside risks to our 4.5 per cent growth forecast for 2022, depending on further developments around lockdowns,” the research agency said. 

Shanghai prices weaken

The Chinese lockdown has, in particular, hit copper hard. Prices of copper have dropped to around $9,500 a tonne currently on the London Metal Exchange from over $10,000 three weeks ago. 

“Shanghai (futures exchange) prices have weakened against its peer in London (LME), creating a window of opportunity for China to export the red metal. And these exports have started to hit LME warehouses, which further weighs on sentiment,” said the ING commodities strategist.

Concerns of skyrocketing inflation and hike in interest rates have also affected consumer sentiments in developed nations, she said, adding that in the medium term the situation could revive once China eases its Covid curbs.

Inflation and interest rates have been hiked mainly in view of the Russia-Ukraine war with crude oil prices flaring up and leading to rise in prices of other commodities, including agricultural produce. The Reserve Bank of India has said inflation would continue to be high over the next few months.

Chinese fiscal policies

Economists see inflation staying high until the War ends since supplies of crude oil, metals such as nickel, and agricultural produce such as wheat, sunflower oil and maize have been affected. Russia is a key supplier of crude oil, nickel and wheat, while Ukraine is the top sunflower oil supplier besides exporting a significant volume of maize to the global market. 

Fitch Solutions said: “We continue to expect Chinese authorities to maintain loose fiscal and monetary policies throughout the year in 2022, in order to stimulate economic activity and growth, which should help to boost demand for metals. We expect demand from the construction sector in particular to support Chinese ferrous metal demand.”

The research agency said it will hold on to its metal price forecasts for this year as rates are still ruling higher than the levels seen before February 24, when thew Russia-Ukraine conflict intensified. 

“We expect Chinese demand to eventually pick up in H2 (second half) that will work to stabilise prices. Additionally, lockdowns in China also act to restrict supply, with China being the world’s largest producer of metals, which will eventually drive prices to a balance in the coming months,” Fitch Solutions said.

ING Think also said it would keep its price forecast unchanged for this year, though it sees the potential for the upside in prices delayed till late in the second quarter or the second half. 

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