June 17, 2017 3:17 am JST

Weak Chinese data puts dent in metals

Copper, zinc down from highs earlier this year

A steel mill in China. Demand is expected to decline as the economy slows.

TOKYO -- Worries about the direction of the Chinese economy are rippling into commodity markets, knocking copper, zinc and other industrial and construction metals off of recent highs.

Of particular note has been copper, demand for which is highly sensitive to economic trends. Three-month futures on the London Metal Exchange were recently around $5,650 a ton, 8% lower than the February high.

One indicator after another suggests that China' economic expansion is slowing. Year-on-year growth in fixed-asset investment slipped to 8.6% in January-May, a decline of 0.3 percentage point from the January-April reading. The Caixin/Markit China Manufacturing Purchasing Managers' Index, a leading indicator of economic activity, fell below 50 in May for the first time in 11 months, suggesting a contraction.

China accounts for more than 40% of global copper consumption. Data from the General Administration of Customs shows a 30% drop in the nation's copper import volume in April compared with the previous month. Declines in LME-listed copper began quickening in March as traders caught wind of weakening Chinese demand. The price have been falling in lockstep with the PMI.

Zinc and lead prices are also falling on the London exchange. Zinc has sunk to just bellow $2,500 a ton, down 16% from its most recent high, while lead is down 13% to around $2,100 a ton. Prices of non-ferrous metals had been rising in anticipation of greater U.S. infrastructure investment under President Donald Trump. But "the focus will be on Chinese demand going forward," said Takayuki Honma at Sumitomo Corp. Global Research in Tokyo.

There are signs of a correction in steel as well. East Asian prices of hot-rolled coil, used in automobiles and appliances, had been rising since last fall on the back of coking coal price hikes, but have dropped 10% from March highs to $500-520 a ton.

China's crude steel output hit a record high for a second straight month in April. But new-automobile sales tipped into decline that month following the expiration of tax incentives, while rising interest rates create headwinds for another steel-hungry industry -- real estate development.

With Chinese steel demand expected to begin declining in the latter half of this year, according to Macquarie Capital, some Chinese steelmakers are resuming discounted exports, raising the possibility of further pressure on Asian prices.

(Nikkei)

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