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Can China stimulus prop up global metal prices?

ICICIdirect Research 08 Jul 2022 DISCLAIMER

What’s Buzzing:

In a recent development, the Chinese government is considering allowing local government to sell 1.5 trillion yuan (~US$220 billion) of special bonds in H2CY22 that would accelerate infrastructure funding and revive the pandemic hit economy.

Context:

In H1CY22, the Chinese economy had witnessed challenging times due to Covid related shutdowns, which had adversely impacted its growth rate. In order to revive the pandemic hit economy, China is looking at an additional US$220 billion fiscal stimulus programme for its economy in the second half of the year. As per industry sources, these bond sales would be brought forward from next year’s quota. Hence, as there is a proposal to adjust the timeline, it needs to be reviewed by the State Council and may also need approval from the country’s legislative body, the National People’s Congress to get implemented.

Our Perspective:

China is the world’s largest consumer of a majority of metals. Hence, Chinese metal demand has a significant bearing on global demand supply dynamics. On account of Covid related shutdowns, China witnessed subdued growth in the current calendar year YTD (especially Q2CY22). In order to revive the economy, China is considering allowing local government to sell 1.5 trillion yuan (~US$220 billion) of special bonds in H2CY22. Furthermore, bond sales are likely to brought forward from next years’ quota, which would mark as the first time that issuances have been fast tracked in such a manner. Previously local governments did not start selling the debt until January 1, when the new budget year begins. The debt would mostly be used to pay for towards infrastructure spending in order to boost the economy, which was hit by Covid lockdowns and a housing slump. The recent step would add to 1.1 trillion yuan (US$ 164 billion) in new support for infrastructure already announced over the past few weeks. On account of muted demand due to Covid related shutdowns, China’s export of steel and aluminium had increased, which has led to a decline in their global prices. Chinese steel exports had increased from 5 million tonnes (MT) in April 2022 to 7.8 MT in May 2022. Similarly, China’s net aluminium exports increased by 106% YoY to 525 KT in May 2022. The stimulus (when implemented) is likely to aid a recovery in Chinese domestic metal demand, thereby likely to result in reduced metal exports from China. Lower Chinese exports would aid in firming up of global metal prices from subdued levels currently.

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