The Weekly W(rap): 16-July-2021 – Positive China GDP data and a dovish Fed

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Macro Developments

As of 16 July, about 189mn Covid-19 cases have been confirmed worldwide, and the death toll has surpassed 4.07mn, according to Johns Hopkins University data. High vaccination rates and falling infections in North America and the eurozone boosted global consumer confidence to a record high in Q221, pointing to a strong but “highly uneven” spending rebound. The Conference Board’s global consumer confidence index rose to 109 in Q221, up one point from the previous quarter. It is the highest level since the survey began in 2005.

On a quarter-on-quarter basis, China’s GDP grew 1.3% in Q221 (previous 0.6%, forecast 1.2%), up from a revised 0.4% expansion in the previous quarter, the National Bureau of Statistics (NBS) said. Q221 GDP was 7.9% higher than a year earlier (forecast 8.1%), compared with YoY growth of 18.3% in Q121, flattered by base effects and the lockdown of the economy in Q120. The government has targeted growth of 6% for 2 21, after 2.3% in 2020, although credit growth remains weaker and on a downward trend. China’s industrial production grew 8.3% YoY in June, down from 8.8% in May. In recent quarters the strength in services and consumption has helped to offset weaker manufacturing and exports.

Source: China National Bureau of Statistics (NBS), MMSteelClub

Fixed asset investment in H121 grew by 12.6% (previous 15.4% expected 12.1%). Investment in fixed assets (infrastructure and property) is one of the main measures of capital spending in China and the index captures machinery, equipment, and real estate development in both urban and rural areas. That it is falling is probably within the Beijing mandate as debt-fuelled building is seen as a low-quality growth model and suppression of provincial government debt growth is a policy objective. Issuance of special purpose bonds, used by local governments to fund infrastructure investments, was 50% lower over the first five months of the year, compared with the same period in 2020. Premier Li Keqiang said China will take comprehensive measures to ease pressure from rising commodity prices. He also warned that it should keep macro policy stable and refrain from flooding the economy with stimulus. Any such loosening threatens to undercut policies introduced to reduce leverage and deal with a series of bond defaults late last year. Quality rather than quantity of growth.

Precious Metals

Stronger than expected inflation prints from the US saw gold sell-off a bit mid-week, the thinking is that higher inflation means the Fed is more likely to act sooner leading to higher rates. Falling yields provided a tailwind to the precious metals, with gold leading the way, as Fed officials were quick to talk down the impact of rising inflation. Fed Chair Jerome Powell in testimony to the Senate Banking Committee reiterated his dovish message. Powell pushed back against the idea that the Fed was coming under pressure to act on inflation as he insisted the labor market has a long way to go. Governor Mary Daly brushed aside the CPI report as an anticipated pop and said that tapering would not start until the end of this year or early next. Thomas Barkin was also dismissive, suggesting the outlook wouldn’t be clear until September. Latest IMF data reports that the Central Bank of Brazil added 41.8t of gold to its reserves in June. This is Brazil’s largest monthly purchase since January 1999 (140t) and takes the central bank’s gold reserves to their highest level since November 1999.

The PGMs and silver were steady in featureless trading and settling into ranges amid slow summer interest.

Lithium-ion batteries are the benchmark for electric vehicles (EVs) for the foreseeable future but obtaining critical metals such as nickel and cobalt present challenges. New battery technology is focused on Lithium Air (Li-Air) and Lithium Sulfur (Li-S) chemistries with 3X to 7X power to weight advantage. Li-S and Li-Air have higher energy density cathodes and higher lithium content, using platinum and palladium. Anglo American Platinum and Platinum Group Metals Ltd. launched a new venture, Lion Battery Technologies Inc., to accelerate the development of next-generation battery technology using platinum and palladium. Thanks to considerably higher energy density, Li-Air and Li-S batteries can perform better, by orders of magnitude, than the best-in-class Li-ion batteries currently on the market or under development. This new generation of lightweight, powerful batteries has the potential to grow to scale on
the back of the attractiveness of battery EVs and the use of lithium batteries in other applications beyond mobility. Li-Air batteries are theoretically the highest energy density batteries with > 1,700Wh/kg. Li-S batteries can reach energy densities as high as 700Wh/kg. In comparison an NCA battery (Tesla) has energy densities of 247Wh/kg.

Base Metals

Base metals remained choppy and in well-defined ranges, the LMEX was essentially flat on the week.

Tin continued to be unaffected by global macroeconomic pressures and reached a new all-time peak amid an already severely constrained supply chain. Officials in China’s Southwest Yunnan province have asked zinc and tin smelters to cut power usage by 25%.

Copper’s supply constraints continue to ease as indicated by the improved availability of concentrates. Fastmarkets’ index for copper concentrates TC/RCs, which measures a mid-point for processing fees paid to smelters, hit $42.2/t & 4.2c/lb, almost double the low set on 9 April. China’s copper imports in June fell 14.4% m-o-m to 1.67Mt (+5%
YoY), reflecting a slowdown in manufacturing activity, which might not just be for seasonal considerations.

Supply constraints in China firmed up aluminium prices, with smelters in China’s Inner Mongolia undergoing power load shifting due to tight power supply in the region.

Source: LME, MMSteelClub

YTD tin is the best performer out of the base metals complex, reflecting strong fundamentals of robust demand, a shortfall in supply and low inventories. As a result, the LME cash tin price continues to command a significant $1,500/t premium over the anchor three-month price. LME tin hit a decade high of $34,462/t in May and is currently trading around $33,000, up by 64% on the start of the year. Physical tin users are paying even more, up to $2,000/t in Europe and over $3,000/t in the US, according to Fastmarkets’ premia assessments. A tight tin market is set to persist as global production continues to struggle amid renewed lockdowns in Indonesia and Malaysia affecting the world’s second and
third largest producers, respectively. Refined tin production fell by nearly 7% YoY in 2020 due to output cuts and operation suspensions as a result of Covid-19.

Tin demand recovered strongly in H220 and into 2021, driven by a boom in consumer electronic demand. Beyond 2021, demand is set to continue to grow, buoyed by several applications that are set to grow rapidly, according to consultancy Roskill. The rollout of 5G networks is set to boost the telecommunications and other electronics sectors. Smartphones account for over a third of all consumer electronics and, after several years of subdued demand, are set to drive consumer electronic consumption once again. The emergence of smart home devices over the last decade has boosted consumer electronics output; such devices accounted for only 2% of output in 2011 but rose to nearly 23% of the total in 2020, added Roskill.

Aluminium, the second-best YTD LME performer is up by 28% and copper just 21%.

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