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Last Updated : Apr 18, 2019 08:28 AM IST | Source: Moneycontrol.com

Comment | China’s growth surprise is a tailwind for metals

There’s an unexpected spring in China’s economy and if that continues, then metal producers should benefit in 2019

Ravi Ananthanarayanan @ravi_ananth

There were two major concerns for investors in metal stocks, with China a common factor. One was the country’s slowing economy and the second was its trade dispute with America. On one count at least, some relief has appeared on the horizon.

China’s economy appears to be responding well to the stimulus measures taken by the country’s managers.

In the March quarter, China’s GDP growth of 6.4percent was better than the 6.3% that analysts polled by Reuters expected. That it outdid expectations was positive but the factors that contributed to it are more important from the metals sector’s viewpoint.

Industrial output rose by 8.5percent in the month of March, the highest in four and a half years. Real estate investment also rose by more than estimated in the first quarter. Growth in these sectors implies higher demand for metals.

If this quarter’s tempo keeps up during the rest of the year, then China’s GDP in 2019 may reach the higher end of the 6-6.5percent growth forecast by its government. The early effects of the government’s stimulus measures have already seen sentiment and prices perk up. Now, economic data appears to be supporting that narrative.

But these are early days, according to analysts quoted in the above-mentioned Reuters report. Therefore, keep a watch on data for the next few months to know if this recovery is sustainable. Another risk is that higher metal prices could see producers step up capacity.

In 2019 so far, spot copper prices on the LME are up by 10.6 percent and that of zinc by 18.6percent. Aluminium has not done that well, and is marginally down. But aluminium’s decline can be partly attributed to a softening of prices, after they had spiked earlier in 2018 upon the imposition of sanctions on United Company Rusal by the US and also because of higher tariffs levied by the US on aluminium imports.

Iron ore prices have been on a roll in 2019 but this is partly attributable to supply problems, after a tailing dam at a major iron ore mine in Brazil belonging to Vale collapsed. That disaster has affected Vale’s operations. At the same time, China too has been stocking up on iron ore. The increase in ore prices has provided support to steel prices too.

If the economic data continues to indicate a growth revival, then demand for these metals should also improve. There are still some uncertainties, notably whether the US and China are able to resolve their trade disputes. If the Chinese economy is able to sustain its momentum, metal prices should look up in 2019.

This augurs very well for Indian companies. Steel companies, for instance, had begun fretting about a decline in steel prices and a moderation in global steel demand. Recently, prices had begun to increase. If that sustains, companies such as Tata Steel and JSW Steel should benefit. Non-ferrous metal companies, especially Hindustan Zinc, should benefit from higher prices.

First Published on Apr 18, 2019 08:26 am
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