Industrial metals continue to face headwinds as Chinese data dis
Industrial metals were the worst performing commodity sector last month and were down 2.7%1. Over the last six months, the sector is down 15.2% and has created the biggest drag on the overall performance of commodities.
China's real estate sector, once the engine of its economy, is now teetering on the edge of crisis because of excessive borrowing, overbuilding, and a housing slowdown. The government's crackdown on risky practices and sudden intervention in 2020 to prevent a housing bubble have led to over 50 Chinese developers defaulting or failing to make debt payments in the last three years. The consequences include reduced consumer spending due to falling housing prices, disappearing jobs tied to housing, and decreased business confidence. While policymakers have taken modest steps to address the situation, the real estate turmoil has spread to financial institutions and the broader economy, prompting concerns of a larger crisis. A build-up in industrial metal inventories over the last 3 months is consistent with market expectations of ample supply of the metals for the rest of the year, given relatively modest demand. Zinc inventory is up 96% while lead inventory is up 85% compared to 3 months ago.
This is clearly weighing on sentiment towards industrial metals. Copper (COMEX) was down 2.8%1, and aluminium down 2.8%1. The only bright spot in the basket was lead, which was up 3.7% last month. Speculative positioning in COMEX copper has been oscillating between positive and negative territories in recent months and entered negative territory again last month after briefly becoming positive2. COMEX copper inventory is up around 46% compared to 3 months ago. And although copper held in COMEX is one of the smaller stores of the metal, when combining London Metal Exchange, Shanghai Futures Exchange and COMEX, copper inventory is still 27% above where it was 3 months ago.
Nickel was down 5.7% last month1. Although nickel is widely known for its use in electric vehicle batteries, a growing market, it still draws around two-thirds of its overall demand from the production of stainless steel. China's steel market has been facing pressure in August due to continued high steel production despite sluggish end-user demand. Blast furnace utilization rates have risen, but some local mills in key steelmaking provinces like Hebei and Jiangsu have not received official communication about output reductions. Uncertainty surrounds the extent of China's steel output cuts for the rest of the year, with expectations of smaller scale cuts targeting environmentally sensitive regions. Rising steel inventories are attributed to robust production and weak demand. Despite potential production cuts, market sentiment remains cautious due to these challenges, and steel prices have declined. This, in turn, is weighing on nickel.
Source:
1 Bloomberg as of 21 July 2023 to 21 August 2023
2 Commodity Futures Trading Commission (CFTC) as of 15 August 2023
3 change in inventory over the past 3 months by United States Department of Agriculture
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
China's real estate sector, once the engine of its economy, is now teetering on the edge of crisis because of excessive borrowing, overbuilding, and a housing slowdown. The government's crackdown on risky practices and sudden intervention in 2020 to prevent a housing bubble have led to over 50 Chinese developers defaulting or failing to make debt payments in the last three years. The consequences include reduced consumer spending due to falling housing prices, disappearing jobs tied to housing, and decreased business confidence. While policymakers have taken modest steps to address the situation, the real estate turmoil has spread to financial institutions and the broader economy, prompting concerns of a larger crisis. A build-up in industrial metal inventories over the last 3 months is consistent with market expectations of ample supply of the metals for the rest of the year, given relatively modest demand. Zinc inventory is up 96% while lead inventory is up 85% compared to 3 months ago.
This is clearly weighing on sentiment towards industrial metals. Copper (COMEX) was down 2.8%1, and aluminium down 2.8%1. The only bright spot in the basket was lead, which was up 3.7% last month. Speculative positioning in COMEX copper has been oscillating between positive and negative territories in recent months and entered negative territory again last month after briefly becoming positive2. COMEX copper inventory is up around 46% compared to 3 months ago. And although copper held in COMEX is one of the smaller stores of the metal, when combining London Metal Exchange, Shanghai Futures Exchange and COMEX, copper inventory is still 27% above where it was 3 months ago.
Nickel was down 5.7% last month1. Although nickel is widely known for its use in electric vehicle batteries, a growing market, it still draws around two-thirds of its overall demand from the production of stainless steel. China's steel market has been facing pressure in August due to continued high steel production despite sluggish end-user demand. Blast furnace utilization rates have risen, but some local mills in key steelmaking provinces like Hebei and Jiangsu have not received official communication about output reductions. Uncertainty surrounds the extent of China's steel output cuts for the rest of the year, with expectations of smaller scale cuts targeting environmentally sensitive regions. Rising steel inventories are attributed to robust production and weak demand. Despite potential production cuts, market sentiment remains cautious due to these challenges, and steel prices have declined. This, in turn, is weighing on nickel.
Source:
1 Bloomberg as of 21 July 2023 to 21 August 2023
2 Commodity Futures Trading Commission (CFTC) as of 15 August 2023
3 change in inventory over the past 3 months by United States Department of Agriculture
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.