Cyclical metals: When good news isnâ€™t good news anymore
Carsten Menke, Commodities Research Analyst, Julius Baer
Commodities suffered broad-based losses yesterday and cyclical metals were the weakest segment. While the sell-off in iron ore and steel continued, it spilled over into the industrial metals. It came despite better than expected Chinese data, which showed that investments into infrastructure, manufacturing and real estate grew solidly in March while industrial production accelerated. Apparently, the markets’ interpretation of the data was that China could be close to a cyclical peak, leading into a slowdown. Following a series of tightening measures across many cities, real estate appears most at risk of a slowdown, which would weigh on metals demand. A case in point is iron ore. With the seasonal peak in Chinese steel production approaching and steel mill margins under pressure, demand is set to soften over the coming months. At the same time, supplies are rising, pushing the market back into oversupply and putting pressure on prices. We see the recent sell-off as a reality check as the past months’ rally had primarily been driven by improving sentiment rather than improving fundamentals. We do not see today’s levels as a buying opportunity, as we remain cautious on the segment in general and bearish on copper in particular.
The sell-off in cyclical metals continued despite better-than-expected Chinese data, signalling that the markets are getting concerned about a looming slowdown. After the past months’ rally, which was primarily driven by improving sentiment rather than improving fundamentals, we see it as a reality check and remain cautious.