One of the main drivers of the surge in metal prices this year, the world’s largest commodity consumer, China, is showing signs of slowing demand, which could lead to lower prices for copper and ore from iron for the rest of the year after a meteoric rally in the first half.
Chinese factory activity growth has slowed to a 15-month low, imports of copper and iron ore are also slowing amid soaring prices and brakes in Chinese steelmaking, while the authorities are releasing stocks of metals from reserves to cool rising prices that increase manufacturing costs.
All of these factors in recent weeks are bearish for Chinese demand – and hence imports – for metals such as iron ore, copper, zinc and aluminum, according to Reuters columnist Clyde Russell. Remarks.
Although analysts say a slowdown in Chinese demand doesn’t necessarily mean lower commodity prices, due to tight global markets, China may not be a key driver of metal demand by the end of the year. end of 2021. This is due to slower growth of factories, ceilings imposed by the steelmaking authorities and the release of tons of metals from Chinese reserves.
Caixin / Markit Manufacturing Purchasing Managers Index (PMI) show this week that Chinese factory growth was at its weakest in July in 15 months, also due to high commodity prices, especially for industrial metals.
Related: Why Norway Won’t Ditch Oil & Gas At the same time, Chinese imports of iron ore, a key material for steelmaking, fell in June to lowest in 13 months, slipping 0.4% from May and 12.1% from June 2020.
China has decided to cap steel production and steel exports this year as part of its commitment to cut emissions. The Chinese authorities have implemented a policy of maintain steel production at its 2020 level.
After a 12% jump in steel production in the first half of the year, the policy means that Chinese steelmaking is likely to decline in the second half, also leading to lower demand for iron ore, analysts said. World time.
“Reducing production is the main theme of the entire steel industry for the rest of the year, not only because of environmental goals, but also because companies cannot produce as much. steel when the cost is so high, ”a steel industry insider told Global Schedules this week.
“Restrictions on Chinese steel plants could cause demand for iron ore to drop by about 75 million tonnes in the second half of the year,” UBS analysts said in a July note released by Reuters.
Restrictions on steel production in China have already caused iron ore prices to drop.
China’s copper imports have also slow motion in recent months, customs data show. But imports of scrap copper have increased, doubling in the first half of 2021, according to metals intelligence firm Roskill.
As manufacturers replace the more expensive refined copper with scrap, “this would undoubtedly lead to a decline in Chinese refined consumption in 2021 – a hugely negative factor for global copper prices to overcome, despite the obvious pick-up in demand in China. the rest of the world “. Roskill noted Last week.
“Watch out for copper. A large wall of scrap metal is still heading towards China, ”the intelligence firm said.
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Copper prices could also drop because of China sales of tonnes of metals, including copper, from state reserves.
“Chinese policymakers have pledged to curb any excessive rise in commodity prices, which could deter some financial investors from re-entering the market, especially given uncertainties in the broader market as the Fed prepares to reduce its asset purchases, “Wenyu Yao, Senior Commodities Strategist at ING, wrote in a July 20 Remark.
For copper prices, “[W]We might end up drifting a bit blindly this summer before more downside risks emerge at the end of 3Q21 and 4Q, ”Yao added.
Demand for most commodities in China is expected to slow in H2 2021, Wood Mackenzie noted in a new China Economic Focus monthly report last week.
“China’s economy is expected to slow in the second half of 2021. Slowing export growth, rising commodity prices, weak infrastructure investment and expiring subsidies will all weigh on the country’s GDP growth. . As a result, we should see a deceleration in demand for commodities in China, ”said Wood Mackenzie senior economist Yanting Zhou.
By Tsvetana Paraskova for OilUSD
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