Global commodities markets are stuck in a holding pattern after China’s latest effort to revive its economy focused on the much-needed restructuring of local government debt, but stopped short of stimulus measures that would directly boost domestic demand.
Delivered by the finance ministry on Friday afternoon, Beijing’s move amounted to a hefty $1.4 trillion bailout to refinance “hidden” debt. Specific steps to revive consumption, however, were lacking — and while raw materials may well benefit from the largesse, it is not yet clear how. Copper, iron ore and crude oil prices all fell after the announcement.
“It’s been a case of another hotly anticipated fiscal announcement from China, and another disappointment for those expecting substantial stimulus,” Hamad Hussain, a commodities economist at Capital Economics Ltd., wrote in a note.
The latest inflation data may deepen the gloom. The world’s biggest raw materials buyer is struggling to break free of deflationary pressures that have sunk prices at the factory gate for 25 straight months and delivered only anemic growth in consumption. Demand for old economy items like oil and steel has fallen this year and those markets are probably now in structural decline.
Powder Dry
The restraint may be in part about keeping government powder dry, given the challenges to trade and the wider economy threatened by Donald Trump’s return to the White House next year. The finance ministry has certainly promised bolder fiscal policy.
For now, economists and analysts left to read the tea leaves. Base metals such as copper and aluminum are likely to have an advantage over construction materials like steel and its feedstock iron ore, key beneficiaries back in 2008, when China unrolled an unprecedented stimulus plan to counter a global financial crisis. Foodstuffs and fuels should see a net benefit from faster economic growth, although there are risks that decarbonization could stymie the gains for oil.
Property and infrastructure spending have been the bedrock of steel consumption in China for decades. Easing local government debt should free up more cash for projects, and the finance ministry said it’s working on how to expand funding to buy idle land and unsold homes. But steel demand requires new construction rather than clearing unsold stock — not to mention that the economy has matured significantly — so neither measure is likely to juice markets this time around.
“China’s attempts to stimulate its steel-intensive property and infrastructure sectors faces a basic problem: those sectors are already built,” said Tom Price, analyst at Panmure Liberum Ltd. in London.
Gasoline Demand
Copper and aluminum, used in the fittings and appliances installed when homes are being readied to live in, may see more direct benefits. They’re also more intensively employed in new economy infrastructure, like power grids and data centers.
Without putting a figure on it, the ministry pledged on Friday to strengthen support for existing programs to upgrade equipment and trade in consumer goods. More new lathes, cars and coolers will translate into more demand for base metals and steel alike.
Oil is more uncertain. Plastics will move with consumer appetites, but gasoline demand is already being dented by electricity-driven high-speed rail and new energy vehicles, and steps to improve the economy will only accelerate that change.
Secular shifts in the economy, moreover, mean that even significant stimulus may struggle to permanently lift raw materials out of the doldrums.
“Structural headwinds from demographics and slowing urbanization mean that any stimulus-related boost to commodity demand will be temporary,” according to Capital Economics.
On the Wire
Chinese and Indonesian firms will sign business agreements totaling more than $10 billion on Sunday, President Prabowo Subianto said as he met his counterpart Xi Jinping in Beijing during a state visit.
China’s consumer inflation was anemic in October while factory-gate prices continued falling, suggesting the government’s latest round of stimulus is far from sufficient to free the economy from the grip of deflation.
China gave indebted local governments a 10 trillion yuan ($1.4 trillion) lifeline but stopped short of unleashing new stimulus, preserving room to respond to a potential trade war when Donald Trump takes office next year.