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China's industrial output cools but metal inventories may still fall


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China's industrial output cools but metal inventories may still fall

The pace of China's industrial output slowed to a multiyear low in a sign of a cooling Chinese economy that could put a drag on commodities demand.

China reported value-added industrial output data Dec. 14 showing it grew 5.4% year over year in November, according to media reports, lower than a median 5.9% growth rate experts bet on in a Reuters poll.

Commodity prices could suffer. "The (price) risks are to the downside because the Chinese economy will definitely cool," Reuters quoted Commerzbank analyst Daniel Briesemann as saying.

The latest Chinese data comes amid ongoing trade talks between China and the U.S. as the world's two largest economies attempt to settle differences over a slew of trading issues, including tariffs and protecting intellectual property.

China appeared to extend an olive branch amid the talks during the week ended Dec. 14, saying it would hit pause on a 25% levy it had imposed on U.S. car imports in response to U.S. tariffs on Chinese goods. The three-month pause is scheduled to start Jan. 1, 2019.

President Donald Trump tweeted ahead of the Chinese announcement, "Very productive conversations going on with China! Watch for some important announcements!"

Meanwhile, the countdown to the next decision by the Federal Reserve on rates continued, with its next meeting concluding Dec. 19. Expectations are that it will again hike a quarter point to 2.5%, according to reports.

Talking points

Despite slowing industrial demand growth in China, visible inventories continue to fall, BMO analysts said in a recent outlook for 2019.

In 2018, "one thing was consistent — the trend drawdown of reported inventory across metals and bulk commodities," the analysts said.

The drawdown partly reflected more fundamental shifts in market dynamics with certain base metals stocks going off exchange, making them harder to see, the BMO analysts said. But it also reflected markets where more is being consumed than produced.

"With a general lack of supply projects coming through, in the main we anticipate that even in a slowing demand growth environment inventories will continue to draw," the team said. "This raises potential for more prolonged periods of backwardation in metals markets, particularly into the seasonally strong second quarter demand period."

Price ring

Steelmaking materials made gains during the week ended Dec. 14. Iron ore prices rose 1.1% to close at US$68.1/t, metallurgical coal increased 0.9% to US$226.9/t, and steel was up 0.6% to US$545/t.

Base metals primarily decreased during the week, with the exception of copper, which ticked up 0.2% to US$6,159/t. Aluminum fell 1.9% to US$1,924/t, nickel was down 0.6% to US$10,781/t, and zinc and lead declined 1.8% and 0.6%, respectively, to US$2,633/t and US$1,953/t.

In precious metals, gold dropped 0.7% to US$1,240/oz and silver held close to even at US$14.6/oz. Platinum was down 0.5% to US$789/oz, while palladium climbed 0.9% to US$1,236/oz.


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