What does the PBOC’s dovish shift mean for metal prices?
Tony Sycamore July 13, 2021 9:15 AM
Fiscal, stimulus, ultra-low interest rates, global infrastructure projects as well as inflation fears propelled metal prices higher. In this article, we will review what comes next for key metal prices following last week's dovish shift by the PBOC.
Events in China play a critical role in determining the price of base metals, both in the short term and the long term. This is because China accounts for 50-60% of base metals demand and around 73% of the world's iron ore imports.
China’s credit impulse turned negative towards the end of 2020 as policymakers emphasised the need for more “prudent” policy and to minimise financial risks. The slowdown in credit momentum along with officials “jawboning” lower commodity prices has reduced demand and a moderation of key metal prices, more noticeable since mid-May.
However, data released last week show Chinese authorities begun to ease conditions in June as both total social financing and new yuan loans increased by more than expected. Total social financing was 3.67 trillion yuan ($566 billion), jumping from 1.9 trillion yuan in May and higher than the 2.89 trillion yuan forecast. Financial institutions offered 2.12 trillion yuan of new loans in June, higher than the 1.5 trillion yuan in May, exceeding the consensus forecast of 1.80 trillion yuan.
Supplementing the rise in aggregate finance, the PBOC cut the Reserve Requirement Ratio (RRR) by 50bps on Friday, effective July 15th. In the accompanying statement, the PBOC reiterated that the RRR cut was in response to the difficulties small to medium-sized corporates faced amid higher commodity prices.
The PBOC’s dovish shift confirms it remains attentive in managing the downside risks to the Chinese economy. Furthermore the PBOC’s easing measures should limit the short term downside risks in industrial metals such as copper and iron ore.
As a precious metal, gold is heavily influenced by macro events. The Federal Reserves’ hawkish pivot in June had a sharp impact on the price of gold, sending it down to a low near $1751. The sell-off a function of gold's negative correlation with rising US real yields/interest rates and a stronger US dollar.
Despite a fall in US real yields in July and the US dollar failing to break higher, investor's attitudes towards gold remains cautious. This is likely to reflect an expectation that the next big move in US yields and the US dollar will be higher and that risks for gold are to the downside.
That said it's important to note that gold has held and bounced from the trendline support currently near $1743, coming from the May 2019, $1266 low which keeps the uptrend in gold intact for now.
However, should gold break below the support at $1750/40 it would indicate a retest of the $1676 low of March is underway, before $1500.
Although silver is part precious metal, and part industrial metal the key driver of the decline in the silver price was the hawkish shift by the Federal Reserve in June for the reasons outlined in gold above.
An expectation that the next big move in US yields and the US dollar will be higher, suggests that the short-term risk for silver is to the downside. In the longer term, a decline into the $22.00/21.00 support region would represent an extremely attractive medium term buying opportunity to benefit from silvers properties as an industrial metal.
The recent slowdown in China has been a headwind to copper although it has partially been offset by strong demand from the rest of the world. As Q2 is expected to be the peak of the recovery and with global manufacturing PMIs already moving lower and global consumption moving further from goods to services, short term risks for copper remain.
In the medium term, there remains a supply and demand imbalance evident in the copper market. Supply growth has been minimal since 2016 and the copper industry’s ability to increase its reserve base by lowering its cut-off grade is nearing an end.
Three times as much copper is used in electric vehicles than conventional internal combustion engines. This is an example of where increased demand for copper will come from in the clean energy investment cycle. Added to this, proposed changes to Chiles mining royalty regime will crimp appetite to make large investments in Chile which produces 30% of the worlds copper supply.
Technically we remain bullish copper, leaning against uptrend support near $4.00, although still requiring a break/close above key resistance at $4.45ish to increase conviction that a tradable low is in place at $4.08 and that the uptrend has resumed.
Iron ore prices remain stubbornly high as supply remains constrained. Demand from China which consumes 97% of the iron ore produced by the world’s two largest exporters Australia and Brazil as well as demand from the world Ex China has been strong, supporting prices in the short term.
Profit margins at Chinese steel mills that combine iron ore with coking coke to make steel have turned sharply lower, even negative in recent months. Additionally, there is evidence that local iron ore producers have begun to ramp up production and that Chinese authorities are turning to scrap steel to reduce reliance on iron ore imports.
Finally, efforts to diversifying iron ore supplies including the building and development of the Simandou mine in West Guinea which comes on later this decade, will negatively impact the price of iron ore. As such a medium term price of $150p/t looks more reasonable than the current price near $217 p/t.
Source Tradingview. The figures stated areas of the 13th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
StoneX Financial Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.