If you’re manning your desk today you know that we got an overnight bloodbath in metals catalyzed by China jitters and an attendant limit down plunge-fest in iron ore…
You can read the details here or, if you prefer a more simplistic take on the ongoing mayhem, you can just look at this chart:
As you might also recall, Goldman is bullish commodities. More to the point, “you’ll have to pry the bank’s Overweight commodities thesis from their cold, dead hands.”
Given that, you might be wondering (because we were), what the bank thinks now.
Well, unfortunately we don’t yet know.
But what we do know is what they thought yesterday courtesy of the latest edition of their “Metals Detector” series which, thanks to the overnight action, is now antiquated.
So that’s amusing. More below.
Base metals and related equities traded sharply lower today (Wednesday May 3), with the exception of aluminium, which fell only slightly and remains one of the stark outperformers of the year in the commodities space.
In particular, copper fell 3.4% or $200/t on Wednesday, to $5,600/t, erasing 4/5ths of the gains it had made over the past eight trading sessions in a single day.
The substantial move lower today was predominantly driven by ‘micro’ and technical factors, in our view, though it was set against a backdrop of broader macroeconomic concerns (China deleveraging, potential turn in the global PMIs/cycle).
- Though copper’s move lower had begun in the overnight session, the vast majority of the sell-off occurred post the release of LME inventory data, which showed a significant build in LME copper inventory, raising questions about both the historical and present fundamentals of the refined market.
- Copper had been testing its 50 and 100 day moving averages to the upside yesterday, but fell sharply below these levels following the inventory build.
- In nickel, the overnight news that the Philippines Environment and Mines Minister Regina Lopez was not confirmed in her position and would thus no longer be able to suspend or close up to c.8% of global nickel supply, placed nickel prices under pressure. Following this news we place our nickel price and balance forecasts under review.
Though the global fundamental and macroeconomic picture is far from clear cut, we remain relatively constructive on the outlook for copper in the short term, and aluminium on a 6-12 month view. Indeed, the macro and micro factors, remain key to our view, despite the recent slowing in the China PMI and rise in LME copper inventories.
On the macro side, while some global PMIs have fallen in April (China most notably), we believe the jury is out as to whether this is the beginning of a series of declines in Chinese and global PMIs which will see them eventually move sub-50. Whether the PMIs move sub-50 is a critical point in our view, as this sell-off will not last if the PMIs put in a floor above 50 using history as a guide (Exhibit 1). Further, it is worth noting that the official China PMI remains in the upper end of its 5 year historical range, and that the most recent decline in the PMI may in part reflect de-stocking owing to higher short term interest rates.
Having said this, our China economists do expect overall GDP growth to slow, and year over year comparisons are expected to become tougher in 2H17, which are concerns for the market at present. The main counterargument here is that for commodities it is the demand level – relative to supply – that matters more than the growth rate (similar to the point we made above regarding the PMIs).
Further, as discussed in detail, the context of China’s tightening is that China’s nationwide property sales and private FAI have been very strong (the latter has largely been driven by the turn in the property market and improving export environment). With a largely closed Chinese capital account and a high savings share of GDP, nationwide Chinese property sales (specifically, into cities not subject to the latest restrictions) are likely to remain bid, supporting growth in metals intensive consumer appliance demand, new starts (albeit at a slow pace due to de-stocking), and related machinery and power infrastructure demand.
On the micro side for copper, Chinese copper domestic physical premiums have turned positive and Chinese bonded premiums have ticked up from $45/t to $55/t over the past month. On the other hand, the draw in exchange and bonded inventories over the past month has been broadly in line with seasonal norms, which does not point to a tight market, set alongside weak near dated LME spreads. We believe this lack of tightness reflects strong refined supply (a lagged impact of prior strong mine supply during 2013-2016), which is likely to end over the next 3 months (given historical mine supply disruptions), helping to tighten the market through the balance of the year (or, in the scenario that demand growth slows down more significantly than we expect, supporting prices at relative high levels).
In aluminium, our 6-12 mo bullish view remains predicated on substantial winter supply capacity curtailments.
So that was yesterday.
And then tomorrow rolled around.