Ravi Ananthanarayanan
Why the US and China need to resolve their trade dispute is becoming painfully evident as time passes. A slowing Chinese economy is bad news, not just for the economic giant but also for ferrous and non-ferrous metals. If economic data out of China keeps sending dire signals, then domestic metal companies are likely to feel the pressure.
Last week, China said its industrial output rose 5.4 percent, which was lower than the 5.9 percent that analysts had forecast, according to a Reuters report. It said that growth was slowing anyway due to the curbs on shadow lending, but the escalation of a trade war with the US has affected it further. This is affecting consumer sentiment too, with retail sales rising 8.1 percent in November, lower than expected. Automobile sales are down too.
Unless China's economy gets back on track, the outlook for commodities will remain weak. A stronger dollar adds to the problem as money can flow out of commodities. Metal prices weakened last week as the market reacted to the data. On the bright side, the US and Chinese governments are planning negotiations to resolve their trade disputes and have made some temporary concessions, which is leading to hope that a lasting solution can be found.
Meanwhile, the fall in metal prices poses a risk to the performance of domestic companies. Aluminium prices are down 6.8 percent since early October on the London Metal Exchange, and are down 15 percent since the start of the year. Zinc prices are down by nearly a fourth since the start of the year. Iron ore prices too have declined.
Although domestic demand continues to be on a strong footing, declining realisations are likely to affect profitability. No wonder then that the S&P BSE Metal Index is down 13.6 percent since its levels of early October.
From here on, much depends on the outcome of the trade negotiations between the US and China. While they can't turn the clock back, if both countries agree to a solution that addresses the concerns of the US without imposing a huge economic cost on China, then that would be a good outcome.
Another tailwind for commodities could be China's government undertaking a fiscal stimulus to spur growth. That too could see commodity prices perk up, but it runs the risk of having only a temporary impact compared to the long lasting balm of the two countries calling a truce on the trade war front.
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