(The opinions expressed here are those of the author, a
columnist for Reuters)
By Andy Home
LONDON, Dec 21 From a year of political upheaval
the metals markets can draw one all-important lesson.
It's still all about China.
Beijing's economic policy U-turn around this time last year
may not have resonated across the world in the same way as
Britain's vote to leave the European Union or the U.S.
electorate's vote for Donald Trump as its next president.
But in the world of industrial metals it has proved just as
defining an event, upending expectations and transforming the
price of everything metallic from aluminium to zinc.
And next year it's going to be all about China as well, with
lots of potential for more surprises.
This time last year London copper was trading just
above $4,500 per tonne, its lowest level since the Global
Financial Crisis of 2008-2009.
And that other industrial bellwether, iron ore, had fallen
below $40 per tonne for the first time since anyone even thought
in terms of a spot iron ore price.
The metals industry was in despair.
The "supercycle" was over. Beijing had said so. The days of
fixed asset investment were to give way to a "new normal", one
characterised by the consumer not the construction business.
But then Beijing changed its mind. Faced with fast-slowing
economic growth rates, it quietly reverted to its "old normal".
The spending taps were turned back on. Government largesse
was once again channelled back down the tried-and-trusted
pathways of infrastructure and property construction.
Real estate investment had been slowing for two years. By
February the trend had reversed. So too had that in newly
started floor space.
The primary engine of Chinese growth, and of industrial
metals usage, was being fired back up again.
Graphic on Chinese real estate investment:
Graphic on China's newly-started floor space:
The funny thing is that no-one outside of China initially
noticed. Everyone had taken Beijing's policymakers at their
As late as March, Andrew Mackenzie, chief executive at BHP
Billiton, was ruefully saying that while the company
"anticipated emerging trends that signalled the end of the boom,
we didn't expect the scale and the speed with which it
By which time the London Metal Exchange index of base metals
had already bottomed out and iron ore had recovered to
above $60 per tonne.
MEET THE NEW PLAYERS
Well, someone at least had noticed. It's just they weren't
on anyone's radar.
Retail Chinese investors were stampeding into the local iron
ore and steel futures markets. Volumes mushroomed and prices
On Monday March 8 the physical spot iron ore price rose by a
staggering 20 percent to $62.60. And it did so first and
foremost in reaction to what was happening to local exchange
Animal spirits? Irrational exuberance?
Everyone thought so, not least the Chinese authorities who
raised margins and trading fees to chase the retail crowd out.
But with hindsight the crowd had made a good, albeit
collectively chaotic, call. The iron ore price today is trading
just shy of $80 per tonne.
Fast forward eight months and the crowd has been making a
similar upside call on base metals.
On the Shanghai Futures Exchange (ShFE) aluminium volumes
last month recorded an all-time record high. Zinc volumes were
the second highest on record. So too where those for tin.
And as for lead! Over 10 million tonnes traded in November,
equivalent to almost the entire global market's annual tonnage.
All have seen sharp price spikes.
Once again the Chinese authorities are pulling all their
margining and fee levers to tame the animal spirits.
The ShFE warned its members last month to be "well prepared
for risk prevention" and to "remind investors to prudentially
judge information from the market and make rational investment".
But what if they are making a rational investment, just in
an irrational way? And if they are, what do they know that we in
the West don't?
One thing's for sure, no-one trading base metals can any
longer ignore what has been dubbed the "on-shore casino".
Where once Chinese fundamentals shaped the price, now it's
both fundamentals and funds.
And there are a lot of funds in China.
HERE WE GO AGAIN?
Beijing, meanwhile, is now trying to control the effects of
its own policy.
"Houses are for people to live in, not for people to
speculate," read a statement issued by top policymakers at the
end of the Central Economic Work Conference.
Stimulus feeds growth but it also feeds property bubbles in
the top Chinese cities. Stimulus must therefore be withdrawn or
at least redirected.
We've seen this movie before. This policy cycle has played
out several times over the last few years.
The best bet is that the taps will be turned off but that
the tail winds will still blow hard over the first part of 2017,
supporting metal prices at their new elevated levels.
By the second half of the year, it's quite possible that
everyone will be talking again about a hard landing in the
Chinese metals sector.
But there's one new potential Chinese driver for metals
Well, not exactly new. Cities such as Beijing have for years
been choking on the smog spewing from the country's huge
industrial production sector.
It's getting appreciably worse, though. Environmental
authorities last week advised 23 cities in the north of the
country to issue red alerts, the highest possible air pollution
It's not as if Beijing has been sitting idly by.
Environmental inspection teams have been touring the country,
ordering closures and remedial action by offenders.
And, critically, any remaining ties between environmental
agencies and local governments will be severed by the end of
this year to avoid what the official Xinhua news agency termed
corruption and conflicts of interest.
Beijing, in other words, is finally starting to get tough in
its self-declared "war on pollution".
And it's going to get tougher still with unpredictable
consequences for its massive metals production sectors.
If you want clues to how that's going to play out, keep on
eye on those domestic Chinese markets.
They may be a new disruptive factor in metals pricing but
their track record on reading Chinese policy signals seems to be
a lot better than those of outsiders.
Come to think of it. Is that maybe why Shanghai lead volumes
more than quadrupled to 2.1 million lots last month? Hhmmm...
(Editing by David Evans)