China’s Economic Rescue Plan Leaves Commodities Stuck on Rest

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(Bloomberg) — Global commodity markets are stuck in a bearish pattern after China’s latest efforts to revive the economy focused on restructuring much-needed local government debt, but stopped short of stimulus measures that would immediately boost domestic demand.

Posted by the finance ministry on Friday evening, Beijing’s move to a $1.4 trillion bailout for debt repayment was “hidden”. Specific measures to revive consumption, however, are lacking – and while raw materials may benefit from their largesse, it is not yet clear how. Copper, iron ore and crude oil prices all fell after the announcement.

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“This is another case of the anticipated fiscal announcement from China, and another disappointment for those who were expecting a lot of stimulus,” Hamad Hussain, commodity economist at Capital Economics Ltd., wrote in a note.

The latest inflation data could add to the gloom. The world’s biggest buyer of raw materials is struggling to shake off deflationary pressures that have driven down prices at the factory gate for 25 straight months and fueled only anemic consumption. Demand for old economy goods like oil and steel has fallen this year and the market is likely to see a structural downturn.

Dry Powder

Those restrictions may be about keeping the government’s powder dry, as trade and broader economic challenges are threatened by Donald Trump’s return to the White House next year. The finance ministry has always promised a bolder fiscal policy.

Now, economists and analysts are left to read the tea leaves. Base metals such as copper and aluminum may have advantages over construction materials like steel and feedstock iron ore, the main beneficiaries in 2008, when China unveiled an unprecedented stimulus plan to tackle the global financial crisis. Food and fuel should see a net benefit from faster economic growth, although there is a risk that decarbonisation could offset oil’s gains.

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Property and infrastructure spending has underpinned steel consumption in China for decades. Reducing local government debt should free up more cash for projects, and the finance ministry said it is working on ways to increase funding to buy vacant land and unsold homes. But steel demand requires new construction instead of removing unsold stocks – not to mention that the economy has matured significantly – so do not measure the possibility to juice the market this time around.

“China’s efforts to stimulate the steel-intensive property and infrastructure sector face a fundamental problem: the sector is already built,” said Tom Price, an analyst at Panmure Liberum Ltd. in London.

Demand for Gasoline

Copper and aluminum, used in fittings and appliances installed when the house is ready to live in, can see other direct benefits. They are also more intensively used in the infrastructure of the new economy, such as power grids and data centers.

Without giving figures, the ministry pledged on Friday to strengthen support for existing programs to upgrade equipment and trade in consumer goods. Newer lathes, automobiles and refrigeration machines will have more demand for base metals and steel.

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Oil is more uncertain. Plastic will move with consumer appetite, but demand for gasoline has been dampened by electric-driven high-speed rail and new energy vehicles, and measures to improve the economy will only accelerate that change.

Secular changes in the economy, also mean that significant stimulus may struggle to lift raw materials permanently from their malaise.

“Structural headwinds from demographics and slow urbanization mean that any stimulus-related demand for commodities will be temporary,” according to Capital Economics.

In Wire

Chinese and Indonesian companies will sign business deals totaling more than $10 billion on Sunday, President Prabowo Subianto said when he met with his counterpart Xi Jinping in Beijing during a state visit.

China’s consumer inflation was anemic in October while factory-gate prices continued to fall, suggesting the latest round of government stimulus is far from enough to free the economy from the grip of deflation.

China gave local governments 10 trillion yuan ($1.4 trillion) in debt but stopped short of releasing new stimulus, keeping room to respond to a potential trade war when Donald Trump takes office next year.

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Sunday Diary

(All Beijing times unless noted.)

Monday, November 11:

• China will release aggregate finance & money supply on November 15

Tuesday, November 12:

• Asian Copper Week in Shanghai, day 1

Wednesday, November 13:

• Asian Copper Week in Shanghai, day 2
  • CRU World Copper Conference Asia, day 1
• CCTD weekly online briefing on Chinese coal, 3:00 p.m

Thursday, November 14:

• Asian Copper Week in Shanghai, day 3
  • CRU World Copper Conference Asia, day 2
  • CEO Summit and Asia Copper Dinner

Friday, November 15:

• China home prices for October, 09:30
• China’s industrial output for October, including steel & aluminum; coal, gas & power generation; and crude oil & refining, 10:00 a.m
  • Retail sales, fixed asset investment, property investment, home sales, unemployment rate
• China will release medium-term lending rates monthly until November 25
• China’s new rules on scrap metal imports are in effect
• China’s weekly iron ore port stocks
• Weekly Shanghai exchange commodity inventory, ~ 15:00

—With assistance from Katharine Gemmell.

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