Death spiral? Not quite, but down we go. Pic: Getty Images
Mining
China’s long-awaited stimulus plan failed to boost optimism last Friday after the National People’s Congress (NPC) unveiled various measures directed towards debt relief for local governments, stabilising infrastructure, and shoring up local government financing vehicles.
The 10 trillion yuan package underwhelmed investors hoping for an economic recovery in the world’s second largest economy with the main measure involving the restructuring of local government debt.
Local governments are now allowed to issue an additional RMB6 trillion (4.6% of GDP) in “special bonds” distributed evenly over the next three years to transfer off-balance-sheet debt onto the official budget.
Additionally, another RMB4 trillion in special bonds will be authorised in increments over the next five years for the same objective.
RBC Capital Markets analyst Kaan Peker said while the transfer of off-balance-sheet debt onto the official budget is beneficial for financial stability, it is unlikely to significantly affect commodity demand.
“The long-awaited fiscal announcement made by the Chinese government on Friday was yet another disappointment for the market,” he said.
“Nevertheless, the government indicated that additional plans are in the works for more fiscal support, with the confirmation that the projected deficit for the upcoming year will be raised.
“New initiatives would also be introduced to facilitate state purchases of land and unsold properties from developers, both of which would be positive for commodity demand, though obviously the lack of detail and limited focus on Friday were disappointing,” Peker added.
CBA’s Vivek Dhar said iron ore prices may fall below US$100/t in the near term due to steel demand concerns as well as doubts on whether the reform is enough to help China’s economy.
“Iron ore’s ability to sustain deeply negative steel mill margins in China without materially falling has been eye-opening over the past 12 months,” he said.
“But we believe policymakers have left the door open to more stimulus, especially around the property sector.
“Chinese policymakers may also be waiting for clearer signals of tariffs from the second Trump administration before responding with additional stimulus,” he added.
“Iron ore and base metal prices will likely rise and fall in line with market speculation of Chinese stimulus over the next six months and it’s for this reason that we think iron ore prices will continue to hold up better than what steel margins would historically have suggested.”
Dhar noted that China’s steel mill margins deteriorated sharply on Monday in response to the country’s underwhelming stimulus.
Although margins have not turned as negative as earlier this year, he said the sharp turnaround from early October shows how quickly China’s steel demand sentiment had soured.
Meanwhile, the LME official settlement cash copper price plummeted in response to Trump’s US election victory, plunging by 3.5% day-on-day last Wednesday – the second highest daily drop this year – reaching a seven-week intraday low of USD 9,175/t.
Benchmark Minerals Intelligence (BMI) said prices recovered the following day, peaking at an intraday high of USD 9,526/t, as markets expected a seismic stimulus response from Chinese authorities, only to be left disappointed by the resolutions of the Standing Committee of the NPC.
“As a result, prices consolidated at USD 9,323/t on Friday, down from an intraday peak of USD 10,000/t on 30 September, when a Harris presidency and an imminent fiscal stimulus bazooka in China were priced in as the base case,” BMI analysts said in the latest Copper Weekly.
“The copper market appears to be pricing in lower demand from China due to increased tariffs, a stronger USD due to inflationary policies and a slower pace of the energy transition.”
For the rest of 2024, RBC’s Peker said Beijing’s plan is to utilise this year’s allocated funds before the year concludes, which could provide some support to commodity prices over the next few months, especially if these funds are directed towards large infrastructure projects.
“So, in the short term, growth is expected to strengthen,” he said.
“We would advise against being excessively pessimistic about the sector at this point, growth is expected to strengthen as Beijing utilises this year’s allocated funds by year-end (~1.6% of GDP).
“However, given the announced measures on Friday, 2025 is likely to be more challenging.
“We await additional initiatives alluded to at the press conference (continued supportive fiscal policy in 2025 and reduced inventories of unsold properties).”
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