Base Metals to Trend Lower on Sluggish Chinese Manufacturing Data

SHANGHAI, Apr. 24 (SMM) –Base metals in Shanghai edged lower recently, fluctuating near their bottom trading range. Although the sharply slowing Chinese manufacturing activity exhibited weak industrial metals demand, expectations on further loose monetary policy stance can provide weak support for base metals.

HSBC announced on April 23rd that the preliminary China HSBC flash Purchasing Managers' Index (PMI) stood at 49.1% in April, up mildly from 48.3% in March, but still below the boom-or-bust level of 50. Manufacturing output in March experienced the biggest rate of contraction since last November. Besides, new orders and export orders indexes in March experienced the largest decline since the eruption of the financial crisis, and continued to contract in April, which heightened market worries over base metals market. This implied both domestic and overseas demand remain sluggish, increasing investor concerns over China's economy and leading to considerable declines in base metals.

Against the backdrop of sluggish economic situation, markets have stronger speculations that China's central bank may cut the reserve requirement ratio (RRR), with some reports expected to fall by 0.5 percentage points during May. However, as CPI rose significantly in March, future inflationary pressures cannot be neglected, so any room for loose monetary measures is limited. Hence, relaxation in future monetary measures will have a limited impact on base metals market, since fine tuning cannot change the basic tone of the government's prudent monetary policy. Coupled with the sliding PMI in Europe and increasing uncertainties in France's presidential election overnight, markets were plagued with a panic.  

SMM holds the view that base metals market pays more attention to China's economic prospects and progress in solving the US and European debt problems at present. Nevertheless, given China's sluggish economic growth, commodity demand will also slow definitely. Furthermore, wait-and-see sentiment keeps participants in spot base metals market buying as needed, so consumption is unlikely to improve significantly. As such, SMM anticipates base metals will continue to move feebly for the foreseeable future.