21 Jul, 2022
China infrastructure plan only offers modest boost to metals
By Avery Chen
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People queue up to take a COVID-19 nucleic acid test on July 6 in a residential community in Beijing, China. The country's ongoing coronavirus crisis has set back a recovery in metals demand. |
China's upcoming infrastructure stimulus will provide some support for industrial metal demand, but an array of headwinds could dampen its impact.
Base metal prices have been falling globally amid growing recession fears, and an economic rebound in China after Shanghai lifted two-month lockdowns would be key to supporting metal demand. The country accounts for about half of global consumption of most base metals. China's Ministry of Finance plans to allow local governments to issue 1.5 trillion Chinese yuan of special bonds by using the 2023 quota to finance infrastructure projects in the second half, Bloomberg reported July 7. The push would fuel demand for infrastructure-intensive metals such as zinc, aluminum and copper for the medium and long term.
The potential recovery would be buffeted by multiple headwinds. The long-struggling real estate sector, which accounts for the largest share of industrial metal consumption — far more than infrastructure — is facing fresh threats as homebuyers boycott mortgage payments on unfinished projects. In addition, the weakening economy outside of China is pressuring exports, and growth in the new energy and the photovoltaic sectors does not offset weak demand from traditional sectors such as cars and home appliances in the short term.
In addition, China's recent efforts to clamp down on the spread of COVID-19 have constrained its economy through restrictions on mobility and gatherings, limiting the stimulus's benefits.
"China's zero COVID-19 policy is a key challenge [to metal demand recovery]. Although the severity of restrictions [is] going to be loosened, things still remain uncertain amidst flaring outbreaks," ANZ commodity strategist Soni Kumari told S&P Global Commodity Insights.
Property remains the biggest drag
China's property sector accounts for 20%-30% of China's copper, aluminum and zinc consumption, the Commonwealth Bank of Australia said in a July 8 note. The property downturn in China would continue to depress demand, analysts said.
"In China, we expect a sequential pick-up in demand in [the second half], but the outlook is mixed with a recovery in infrastructure and domestic demand post-lockdown offset by a muted recovery in property and risks to exports," James Kan, UBS' head of Asia Basic Materials Research, said in a July 5 note.
UBS expects China's central government to offer more stimulus to prevent a "hard landing" for the property sector. "But it won't drive a material acceleration in commodity demand," Kan said. The bank estimated that China's property sales and new home starts will decrease by more than 15% in 2022 compared to the prior year.
Among infrastructure stimulus measures, China's power grid investments would likely boost aluminum while playing a minor role in domestic demand. Chinese state-backed metal consultancy firm Antaike expects China's domestic aluminum consumption to slide by 0.1% in 2022, with property sector demand falling 6.2% year over year.
A delayed reaction
Infrastructure spending will take time to be felt in the economy, which could also suppress a strong metals recovery in the second half.
China's infrastructure sector accounts for 20%-35% of domestic zinc, aluminum and copper consumption, according to the Commonwealth Bank of Australia.
Zinc might be the first metal to benefit from the stimulus, He Xiaohui, a senior copper analyst at Antaike, said July 7 at the firm's 2022 Nonferrous Metals Market Report Conference in Beijing. For other nonferrous metals, the positive effect would become more visible in 2023, He said.
But even for zinc, the policy-driven recovery will be limited in the second half, Antaike zinc analyst Wang Jianyue told Commodity Insights. The new infrastructure investment is more likely to land in the fourth quarter, which is usually an off-season for zinc, Wang said.
Not enough buyers for what China is selling
A lack of export orders is also slowing the recovery in metal demand.
After China contained the initial wave of COVID-19, the country's manufacturing recovery in late 2020 largely benefited from unleashed pent-up overseas demand. However, some commodity buyers shifted from China to Southeast Asian countries as more recent lockdowns in major cities weighed on the domestic supply chain and pushed up product prices.
"Given the points we are making about the ex-China outlook and also the impact that inflation and the policy response to that is having on consumers in the Western world, it's very unlikely that China's export strength is going to continue," Marcus Garvey, head of commodities strategy at Macquarie Group, said July 12 during a London Metals Exchange seminar. "We would expect it at best to go sideways."
Long term upside
China's green investment push and new infrastructure spending give some long-term hope for metals demand, analysts said.
"[The] green energy transition is a structural supportive story for metals, and this could potentially make industrial metals resilient from an economic downturn," ANZ's Kumari said.
Chinese President Xi Jinping called for the ramp-up in green investments and new infrastructure to achieve the country's climate targets. Surging demand for renewables will increase the demand for copper, steel, aluminum and zinc, ANZ Research said in a July 14 note.
Copper demand is expected to jump with increasing solar and wind energy infrastructure, ANZ said. "Since demand for renewables looks to be more driven by government mandates and targets, this should be relatively resilient against an economic slowdown," Kumari and Betty Wang, senior China economist, said in the note.
However, Antaike's He said demand from traditional downstream industries is facing downside risk as companies have started replacing copper with cheaper aluminum, which would offset the growing demand for solar photovoltaic systems and electric cars.
As of July 19, US$1 was equivalent to 6.74 Chinese yuan.
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