The impact of stimulus on the slowing Chinese economy is due to take six to nine months to flow through to demand for industrial metals, giving a boost to prices in the second half of the year.
China accounts for the bulk of global demand for industrial metals such as bellwether copper, absorbing nearly half of all that metal produced each year, mainly in the power and construction sectors.
Beijing this week trimmed its economic growth target, but also increased its plans for stimulus, including billions of dollars of tax cuts and infrastructure spending.
“There’s a lag, so you’re looking at the latter part of this year for evidence that the economy has stabilized,” said Robin Bhar, head of metals research at Societe Generale in London.
“Our economists look at the credit growth cycle, which has now picked up, and that leads underlying GDP by anywhere between six to nine months. So let’s say the fourth quarter for tangible signs of that then flowing through into better (metals) demand.”
In January, China’s total social financing, a broad measure of credit and liquidity in the economy, hit a record 4.64 trillion yuan, far more than expected.
The index of the six main industrial metals on the London Metal Exchange hit a five-year peak in early June last year, but tumbled 22 percent over the following six months.
The slide last year was largely due to worries about China’s economy, which was already slowing due to a clamp-down on credit growth when a trade war with the United States erupted and deepened concerns about metals demand.
The LME index has recovered about 10 percent from an 18-month low touched in early January on increasing hopes that a U.S.-China trade deal will be agreed.
While the Chinese credit cycle seems to have turned higher, analysts expect further weak data in coming months showing actual metals consumption, for example in manufacturing.
Metals prices are due to be volatile, with expected weak Chinese data weighing on the market, while a trade deal agreement together with peak seasonal demand in the second quarter may pull it in the other direction, analysts said.
A key indicator for base metals consumption is manufacturing data, which have been soft for the past several months.
Both the official and the Caixin/Markit manufacturing Purchasing Managers’ Indexes have sunk below the 50-mark separating growth from contraction on a monthly basis, and the official index hit a three-year low in February.
Although the Caixin index, which focuses on smaller firms, ticked higher in February, the timing of the Chinese New Year may have distorted the data, some analysts said.
“When averaging the index for January and February, activity still appears to be sluggish, which does not bode well for the prices of energy and industrial commodities,” Yasemin Engin at Capital Economics said in a note.
“Looking ahead, we forecast further weakness in China’s economy as the earlier slowdown in credit growth weighs on economic activity.”