Following a strongly inflationary metal environment in Q1, Q2 2022 is looking like a whole different ballgame. Indeed, it's no secret that the global economy is currently facing a number of major challenges. Alone, none of these would be enough to derail us from last year's strong rebound. When added together, however, they're helping to shape a far-from-rosy outlook for the 2022 metals forecast.
A recent Capital Economics note to clients phrases it particularly well, stating that "all three of the world's major economic blocs are now facing significant headwinds." In the US, the storm stems from an increasingly-hawkish Federal Reserve. Meanwhile, the euro-zone faces mounting pressure from the recent massive squeeze in real incomes which threatens to push the region into recession. In China, the government's immediate challenge has been quashing the continuing Omicron outbreak. Unfortunately, the country's zero-COVID initiative has so far done little to affect the spread of the virus. What it has done is tightened restrictions across some of the country's biggest and most economically-important cities.
The Omicron variant is by far the biggest wave of infections to hit China, a country still woefully under-protected in terms of vaccines. According to CE, the areas impacted account for some 40% of China's GDP and 80% of China's exports.
China Activity in Areas with Local Outbreaks (%)
Even without the lockdowns, China's outlook is challenging to say the least. Its construction sector is struggling under extreme debt. Meanwhile, fewer young buyers than ever before seeing any benefit to investing in the property market. To make matters worse, exports are struggling as consumption habits adjust in overseas markets.
CE points to Amazon's Q1 results to illustrate a return to pre-COVID demand levels as services rebound. But according to Reuters, China's factory activity slumped at the fastest pace in two years this past March. In fact, the Caixin purchasing manager's index slid to 48.1, its lowest reading since the first pandemic wave in early 2020. The official PMI also dipped into contraction territory, slipping below 50 for the first time this year.
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New orders are falling particularly fast, reflecting both stalled domestic demand and the disruption to overseas markets. Of course, most of these disruptions result from Russia's "special military operation" in Ukraine. Regardless, if China's economic growth slows and industrial and construction demand weakens, the metals forecast from the world's largest consumer will weaken as well.
Not surprisingly, metals prices have already started slipping. After reaching a high above $10,600/mt last month, copper prices today fell below $9,500. There's no doubt about it: the bears have returned to short the market. Aluminum has followed copper's lead despite a March surge caused by the EU's rejection of Russian supplies. China's woes are a factor here, too, as the country has been ramping up primary metal output. As a result, semis exports have been rising strongly.
Demand is the prevailing narrative in today's metals market. As activity in all three regions continues to slow, demand for industrial metals is likely to ease. Still, whether an improvement in global logistics delays remains a leading or lagging indicator is debatable. Either way, there's no doubt they are gradually becoming less of an issue for metal supply. The bears may be here, but the market has yet to turn its way. Q2 and Q3 will have a lot to say in that discussion.
By Stuart Burns via AG Metal Miner
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