GLOBAL commodities markets are stuck in a holding pattern after China’s latest effort to revive its economy focused on the much-needed restructuring of local government debt, but stopped short of stimulus measures that would directly boost domestic demand.
Delivered by the finance ministry on Friday (Nov 8) afternoon, Beijing ’s move amounted to a hefty US$1.4 trillion bailout to refinance “hidden” debt. Specific steps to revive consumption, however, were lacking – and while raw materials may well benefit from the largesse, it is not yet clear how. Copper, iron ore and crude oil prices all fell after the announcement.
“It’s been a case of another hotly anticipated fiscal announcement from China, and another disappointment for those expecting substantial stimulus,” Hamad Hussain, a commodities economist at Capital Economics, wrote in a note.
The latest inflation data may deepen the gloom. The world’s biggest raw materials buyer is struggling to break free of deflationary pressures that have sunk prices at the factory gate for 25 straight months and delivered only anaemic growth in consumption. Demand for old economy items such as oil and steel has fallen this year and those markets are probably now in structural decline.
Powder dry
The restraint may be in part about keeping government powder dry, given the challenges to trade and the wider economy threatened by Donald Trump’s return to the White House next year. The finance ministry has certainly promised bolder fiscal policy.
For now, economists and analysts left to read the tea leaves. Base metals such as copper and aluminium are likely to have an advantage over construction materials such as steel and its feedstock iron ore, key beneficiaries back in 2008, when China unrolled an unprecedented stimulus plan to counter a global financial crisis. Foodstuffs and fuels should see a net benefit from faster economic growth, although there are risks that decarbonisation could stymie the gains for oil.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Property and infrastructure spending have been the bedrock of steel consumption in China for decades. Easing local government debt should free up more cash for projects, and the finance ministry said it’s working on how to expand funding to buy idle land and unsold homes. But steel demand requires new construction rather than clearing unsold stock – not to mention that the economy has matured significantly – so neither measure is likely to juice markets this time around.
“China’s attempts to stimulate its steel-intensive property and infrastructure sectors face a basic problem: those sectors are already built,” said Tom Price, an analyst at Panmure Liberum in London.
Petrol demand
Copper and aluminium, used in the fittings and appliances installed when homes are being readied to live in, may see more direct benefits. They are also more intensively employed in new economy infrastructure, such as power grids and data centres.
Without putting a figure on it, the ministry pledged on Friday to strengthen support for existing programmes to upgrade equipment and trade in consumer goods. More new lathes, cars and coolers will translate into more demand for base metals and steel alike.
Oil is more uncertain. Plastics will move with consumer appetites, but petrol demand is already being dented by electricity-driven high-speed rail and new energy vehicles, and steps to improve the economy will only accelerate that change.
Secular shifts in the economy, moreover, mean that even significant stimulus may struggle to permanently lift raw materials out of the doldrums.
“Structural headwinds from demographics and slowing urbanisation mean that any stimulus-related boost to commodity demand will be temporary,” according to Capital Economics. BLOOMBERG
