By Ese Erheriene And Matthew Cowley
Metals prices plunged Monday as investors accepted that the
Chinese government isn't going to provide fresh stimulus, at least
for now, despite some recent signs of weakness in the world's
second-largest economy.
Nickel three-month contracts traded on the London Metal Exchange
fell 4.5% to $16,980.00 a ton in late afternoon trading in London,
while the three-month copper contract was down 1.8% at $6,715.00 a
metric ton.
Share prices in major mining companies were also down sharply
Monday, led by Switzerland-based trading and mining company
Glencore PLC, which was down 4.9% at GBP3.42 ($5.59). Rio Tinto
shares were down 3.8% at GBP30.59 and BHP Billion PLC was off 3.5%
at GBP17.31.
There are growing concerns that China, one of the largest
producers and consumers of base metals, won't be able to meet its
full-year growth target of 7.5%, and many investors had believed
that would spur the government into action.
They had made bets that metals prices would rise, even though
the Chinese government has said it wants to address the distortions
in its economy, moving away from an export-driven model and toward
greater domestic consumption.
Over the last week, two clear signals gave metals investors
pause for thought.
First, the government provided some 500 billion yuan ($81.4
billion) to the country's top five banks, but many analysts believe
this won't do much for the real economy. Second, over the weekend,
Chinese Finance Minister Lou Jiwei said the government won't change
its economic policies just because one piece of economic data was
disappointing.
While he didn't say which data he was referring to, his comments
were widely seen as a sign that the government is reluctant to
provide the sort of stimulus the metals market was looking for.
"I think it's quite a surprise that they haven't done any more
on the loosening side but this is pretty much what they've been
telling us," said Joseph Murphy, a commodities analyst at Hermes
Investment Management, which manages $400 million in commodities
assets and advises on a further $1 billion. "It's come as a
surprise to the market because I think they were expecting
more."
The possibility of fresh action from China isn't being entirely
discounted. There is still some expectation that if the economy
declines at a faster pace, then the government will intervene.
"At some point if it does get materially worse from here they
[the Chinese government] will step in, but at the moment I think we
need to see quite a bit more weakening data," Mr. Murphy said.
A first important signal will come from Chinese manufacturing
data out on Tuesday. If the PMI data dip below 50, as some analysts
expect, it will be the second consecutive month of declines.
In addition to the concerns about China, the strength of the
dollar has been weighing on metals prices. Contracts are mostly
dollar-denominated, and prices typically fall when the U.S.
currency gains, which has been the case in recent weeks as markets
prepare for the U.S. Federal Reserve to begin raising interest
rates. A wider difference in interest rates between the U.S. and
its trading partners typically strengthens the dollar.
Another key metal, iron-ore, was also down. The benchmark price
of iron ore with 62% iron content imported through China's Tianjin
port was down 2.3% to $79.80 a metric ton on Monday, according to
data from the Steel Index, a research firm. Prices are down 40.5%
from the start of the year.
Iron ore "is such a big part of Chinese development and Chinese
demand that isolated it is more of an indicator of health than
something that's more global," said Jodie Gunzberg, global head of
commodities at S&PDow Jones Indices.
The market isn't betting on a collapse in metals prices. Most
see Monday's decline as limited to a removal of some of the
over-enthusiasm that had built up around the Chinese government's
actions. But the Asian giant remains a huge global player and, even
at a slightly slower pace of growth, will retain its voracious
appetite for raw materials. A number of metals markets are expected
to move into deficit, with demand outstripping supply.
"A stronger U.S. dollar has taken the shine off these metals and
led to a selloff for now, but the underlying issues remain and we
would expect the market to start focusing on a lack of future
copper and zinc supply growth as we move into 2015," said Catherine
Raw, a fund manager at BlackRock.
Write to Ese Erheriene at ese.erheriene@wsj.com and Matthew
Cowley at matthew.cowley@wsj.com
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