Metals: China fears subside – Goldman Sachs

The research team at Goldman Sachs explains that fears surrounding the outlook for metals prices have subsided in recent days and prices have rebounded off of their local lows.

Key Quotes

“The modest retracement in large part reflects a reduction in concerns surrounding the potential for aggressive policy tightening, which our China economists had anticipated, as well as - albeit to a lesser degree - a strengthening of oil prices which in part reflected news that Saudi Arabia and Russia had agreed to extend their output cuts for another 9 months.”

“Overall the latest Chinese ‘old economy’ data was solid in our opinion, albeit mixed in its composition.

• The bright spot continues to be the property market, with nationwide sales continuing to rise on a sequential basis (seasonally adjusted), inventories continuing to decline, and new starts continuing to rise, despite the ongoing crackdown on property speculation in more than 40 cities. Were property sales to remain unchanged from their recent level for the remainder of the year, the 2017 yoy print would be c.17% growth. We believe property sales are likely to remain strong on a nationwide basis owing to a lack of other investment options, a high savings rate, and a closed capital account.
• Though infrastructure investment rose in April and is running at a high level, manufacturing FAI weakened sequentially in line with the recent PMI readings, and the outlook for growth in these two sectors based on our latest China corporate and government FAI indicator is for a further moderation in May, and potentially June, relative to April.”

“While it is important to note that uncertainty surrounding the degree of Chinese policy tightening and the magnitude of its impact on the real economy could continue to sideline some market participants in the very near term, we maintain our constructive outlook for aluminium market fundamentals on a 6-12 month view (based on aluminium being the next metal expected to benefit from supply-side reform in China), and copper market fundamentals on a 3-month view (based on supply tightening and solid albeit slowing demand growth). Meanwhile, our base case is relatively neutral on iron ore relative to its backwardated forward curve on a 3-6 month horizon, as spot iron ore is expected to fall owing to relatively strong supply growth.”

“Overall, while we acknowledge that overall Chinese GDP growth is set to slow following the recent strong data and policy tightening, we continue to believe that commodity prices are driven by demand and supply levels not growth rates.”