Torlizzi Base Metals Report: Signs of Support

Base metals and steel received support in late June and early July of 2017 after some better-than-expected macro data from China.

Capital Economics: When China’s official manufacturing PMI (purchasing managers’ index) published in early July pointed to stronger manufacturing activity, we were skeptical. After all, it is not unusual for the official index to provide false signals.

But the next week, the Caixin manufacturing PMI, a more reliable measure of cyclical trends, also pointed to a pickup. After declining for three consecutive months, the index rose from 49.6 to 50.4 in June.

Most analysts had expected the index to remain below 50, the line that in theory separates expansion from contraction. (The Bloomberg median was 49.8 and our own forecast was 49.5.)

The breakdown suggests that both foreign and domestic demand strengthened in June, with export orders and overall new orders rising in tandem. The employment component also improved, though it continues to lag the output component.

Finally, the price components both increased for the first time since November, adding to evidence that downward pressure on producer prices may now be easing. Overall, the June readings of the manufacturing PMIs point to some improvement in economic conditions at the end of Q2.

The better-than-expected data from China prompted a new wave of speculation on the China steel sector. Bloomberg reported that Chinese investors had built up an unprecedented volume of positions on steel futures - open interest SHFE steel rebar surged to a record 2.82 million lots (each lot representing 10 metric tons). This is more than double the level at the start of the year as investors have piled up positions in the past two weeks amidst rising prices and renewed optimism around demand.

Focusing on the United States economy, we remain concerned about the auto sector. U.S. auto sales fell 3 percent last month. It was the sixth straight monthly decline as sales dropped off last year's record pace.

For the first six months, car and truck sales fell 2.1 percent, the first such decrease since the financial crisis in 2009. In June, Ford, General Motors, Fiat Chrysler and Hyundai all reported sales drops. Fiat Chrysler sales were down 7.4 percent, while Ford said its sales declined 5 percent. GM was off 4.8 percent, and Korean automaker Hyundai posted a hefty 19.3 percent decrease. Nissan, Toyota and Honda each reported small increases on Monday, but they weren't large enough to offset declines in Detroit.

Autotrader senior analyst Michelle Krebs says the small first-half dip is not an indication of broader economic troubles. She doesn't expect a big recovery in the second half of the year, but also doesn't see a huge decline, predicting full-year sales from between 16.8 million to 17.3 million. That's still below last year's record of 17.55 million.

Commodities Pricing Trends (pricing per metric ton)

July 6, 2017                         Jan. 1, 2017        % change

LME Copper                                         $5,849                                 $5,481                 +6.7%

SHFE Copper                                       $6,862                                 $6,730                 +2.0%

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LME Sec. Aluminum              $1,665                                 $1,560                  -6.7%

LME Nickel                                           $9,100                                 $9,970                 -8.7%

LME Ferrous Scrap                               $298.00                               $297.00               +0.3%

SGX Iron Ore                                        $62.23                                 $74.01                 -15.9%

SHFE Rebar                                          $543                                   $434                   +25.2%

The author is managing director of Milan, Italy-based T-Commodity, and can be reached at gianclaudio@t-commodity.com. T-Commodity is a consultancy specializing in market intelligence, risk management and educational services on commodities and foreign exchange markets.