Previous monetary-easing measures by China had boosted commodities prices
HONG KONG—Central banks from the world’s two largest economies may be headed in different directions. Neither are doing much to help stoke moribund metals markets.
Last week’s quarter-point interest-rate cut by the People’s Bank of China—its sixth since November—has failed to stir price rises in metals, even though China accounts for more than 40% of the world’s demand from aluminum to iron ore.
The looming prospect of a rate rise by the U.S. Federal Reserve and the uncertainty over its timing have meanwhile dampened hopes of a sharp uptick for metals like copper or zinc, despite recent production cuts signaled by major producers like Glencore PLC aimed at reducing global over supply.
The muted response in the metals market to China’s rate cut demonstrates how concerned investors have become about the health of the country’s economy, as well as the impact of its gradual move away from an investment-led growth model.
In past years, a series of Chinese interest-rate cuts would have sent commodities prices soaring. This time, the PBOC’s move to free up more money has merely stabilized copper and iron-ore prices, which are trading just above recent multiyear lows at $5,178 a metric ton and $50.8 a ton respectively.
Prices of three-month aluminum futures sunk to a six-year low this week at $1,476.50 a ton, while zinc, widely used in steelmaking, is trading near a two-week low at $1,738.50 a ton.
“These kinds of stimulus measures have been put in place before, but there has not been any material response. We see price weakness even next year,” said Carol Cowan, a senior vice-president at ratings agency Moody’s Investors Service.
Base-metal prices could even head further downward over the next 12 to 18 months, Moody’s said in a report, citing muted economic growth in Europe and weak economic recovery in the U.S. as other challenges.
Prices of most metals including copper, nickel and zinc touched multi—year lows through August and September as evidence of slower manufacturing and economic growth in China weighed on investor sentiment.
To be sure, there have been some more positive signs from China recently, such as a rise in copper imports in September, a firming property-market and more purchases by China’s state electricity grid, which uses copper in power transmission cables.
But doubts remain over whether these positives will persist, as the demand pickup may be seasonal in nature. Ample property inventory levels could mean that an uptick in sales may not translate into higher metal demand for some months, analysts say.
Investors are meanwhile awaiting the outcome of a Federal Reserve meeting later Wednesday for its latest thinking on a potential interest-rate increase.
The dollar has strengthened, quoting close to yearly-highs, amid speculation the Fed could indicate it will move rates higher later this year, or early in 2016. A rate increase is likely to boost the value of the dollar further. That would be negative for dollar-denominated metals which would become more expensive for buyers in foreign countries.
There is a one-in-three chance of a Fed rate increase before the end of the year, according to ANZ Bank, which said it is “cautious” about commodity prices given weak demand conditions.
Even if the Federal Reserve gives no clear indication on interest rates, metal prices are unlikely to rally significantly, said Daniel Ang, analyst with Phillip Futures Ltd., because of the weak outlook for China’s economy.
“Bullish momentum is going to be difficult,” he said.
