Slowing Economic Growth to Weigh on Base Metal Prices Short Term

SHANGHAI, Aug. 12 (SMM) – A slowing economic growth shown in China’s latest economic data and European economic reports added to market worries over the world’s economic outlook, and major stock markets plunged, dampening market sentiment. In this context, market risk appetite reduced, and investors looked for the US dollar as safe-haven sending base metal markets lower across the board.

China July Inflation Intensifies, Economic Growth Slows
According to the data released by China’s National Bureau of Statistics on August 11th, China’s CPI data surged in July, and its economy grew at a slower pace. China’s CPI was up 3.3% in July on a yearly basis, up 0.4% from June levels; PPI was up 4.8% YoY, down 1.6% MoM. In July, added-value of industrial enterprises above designated size grew 13.4% YoY, down 0.3% MoM; urban fixed-assets investment were RMB 11.9866 trillion from January to July, up 24.9% YoY, down 0.6% from the growth rate posted in the first six month of 2010. All major economic indexes fell except the CPI set a new year high. In addition, the growth of China’s imports experienced marked declines in July based on data released by China Customs. According to the data from the Central Bank, M2, the broadest measure of money supply, grew 17.6% from a year earlier, down 0.9% from 18.5% in June, falling for a eighth straight month since November 2009. M1, cash in circulation plus current corporate deposits, was up 22.9% YoY, and down 1.7% MoM, marking the 6-straight month decline after hitting a high of 39% in January 2010. Narrowing money supply in July indicates a moderating pace of economy.

US and UK Governments Cut Economic Growth Forecasts
Data released by the US Department of Commerce on August 11th shows the US trade deficit in June expanded to a 21-month high of USD 49.9 billion, higher than previous predictions of USD 42 billion, setting a record high since October 2008. The slowing US economy depressed financial markets. In addition, the recovery of European economy was also weaker than expected, and the Bank of England cut growth forecast for UK economy, and said it may not take tightening measures before 2Q 2011. Meanwhile, the Federal Reserve previously said the pace of recovery in the U.S. is likely to be "more modest" than forecast. In this context, officials and market players have become cautious toward the pace of economic recovery following slowing economic activities, which helps limit market risk appetite.

Major Financial Markets Slump, Recent Base Metal Market still under Pressure
Financial markets at various courtiers responded immediately towards possible economic slowdown. On August 11th, the US equity markets slipped sharply, with Dow Jones industrial average stock index slumping to 10,378.83 points, down 265.42 points or down by 2.49%, the largest decline for a single day since June 29. CRB index ended 3.45 points lower at 268.83 points on Wednesday, down by 1.27%. Market players sold off equities and commodity futures, and purchased the US dollar instead as a tool to hedge against financial risks. In this context, the US dollar index was pushed up significantly. International base metal markets were still under pressure, and LME base metal prices ended with losses across the broad on Wednesday. LME copper for delivery in three months ended at USD 7,192/mt on Wednesday, down USD 112/mt from a day earlier. LME aluminum for delivery in three months closed at USD 2,143/mt, down USD 29.5/mt from a day earlier, and LME zinc for delivery in three months closed at USD 2,053/mt on Wednesday, down USD 41/mt from a day earlier. Technical indicator MACD for LME copper suggests that LME copper prices face relatively high risks to slip in the short term. Taking the major economic data and technical indicators into consideration, base metal prices still have certain room to fall in the short term after a consecutive two-month rally, although it is recognized that the economy will recover in the long term and base metal prices will cease to slip and gradual climb up in the mid-term. Further improvement on demand fundamental is still needed if LME base metal prices are expected to resume upward momentum.

Copyright © SMM. All Rights Reserved

None of this material may be used for any commercial or public use in any forms or means, without the prior written consent of SMM. For reproduction issue, please contact us by email: service.en@smm.cn