Distrust in the health of the Chinese economy gained, and sentiment in industrial markets waned
Global steel sector outlook is grim, with weak demand in most regions and oversupply
Going forward, dollar strength, weak China data and a Fed rate hike overhang base metals markets
Manufacturing activity weakens
The macroeconomic landscape in China is changing, with slowing economic growth. The Chinese economic growth model is adopting consumption as its new engine, while the growth model based on the investment engine always guaranteed a spot on the podium. And the current economic slowdown is mainly related to the weakness in industrial business activity. As a legacy of the investment-led growth strategy, industrial sectors in China (as well as the real estate sector) are faced with significant overcapacity. The pace of growth in industrial output is slowing in China. The Caixin PMI manufacturing index signalled a further contraction and stands at the lowest level since March 2009. Relative to industrial output growth in other major economies such as the EU, US and Japan, the pace of China’s output growth is still high. But we cannot ignore the fact that China still faces several major macro-financial risks, which if not managed well could trigger a hard(er) landing.
Industrial metals prices settled lower
Prices for industrial metals remain subdued compared to the start of 2015, with severe losses in both ferrous and base metals markets. Prices for coking coal, steel and zinc ended over 20% lower, while nickel decreased by 34%. China, which is a heavy industrial metals user, is the main cause of metal prices distress. And the situation has not changed much since the start of Q3 2015. Industrial metals price weakness continued and prices have settled lower so far, with the exception of iron ore. In base metals, volatility has increased strongly over the last couple of weeks in the wake of the Fed meeting and disappointing PMI Manufacturing numbers from China. Well-supplied ferrous metal and aluminium markets are keeping prices low. Any production cutbacks are very welcome, and should lift prices in due time. But for now, all eyes are on the macro-economics. The real concern is the state of the Chinese economy and the levels of industrial metal demand.