Baseline: Base metal price gains moderate as demand outlook sours

Fundamental weakness in demand has caused a year-to-date retrenchment in the base metal index. Some explanations include souring macro demand conditions in the US, and weaker than expected economic forecasts from China after its annual ‘Two Sessions’ meetings (annual plenary sessions of the National People's Congress and of the Chinese People's Political Consultative Conference.)

LME Base Metal Index Price Performance

Source: Bloomberg, StoneX analysis.

Disappointing Chinese growth targets cut demand for base metals

Markets were disappointed with the release of China’s annual economic targets, given only a moderate outlook for growth, stimulus, and job creation:

Firstly, GDP growth estimates were set at around 5% for 2023, a point lower than market expectations, and the lowest target level of growth in 30 years
Secondly, the fiscal deficit was set at 3% of GDP which was higher than the 2022 target of 2.8%; in reality, with spending having risen to 4.7% of GDP by year end 2022, this is being seen as a reduction
Thirdly, energy intensity is being set at around 2% this year, following no target set last year (as China concentrated on economic recovery), and down from 2021 levels of 3

Slower growth in green tech crimps green metal demand, short-term

Despite a pledge to control fossil fuel usage, coal will still play an important role in China’s energy usage. With coal still the country’s main fuel source for this year, green tech growth will slow.

China faces a struggle to dominate green technology – likely to become its next large export market – which is likely to be constrained by the need to support economic recovery and avoid the power outages of last several years.

Conventional energy sources will take up the slack. Annual fossil fuel output last year having jumped by 10%.

In the longer-term, we still forecast that robust local spending in green and renewable energy projects, supporting resilient demand for ‘green metals’ (aluminium, cobalt, copper, lithium, nickel, silver and zinc.)

Taken from an analysis by Natalie Scott-Gray, Senior Metals Analyst.

Contact: natalie.scott-gray@stonex.com.

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