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China’s slowdown leading metal prices to ‘new equilibrium’

Keywords: Tags  Copper, commodity prices, China slowdown, gross domestic product, GDP, Ian Roper, CLSA Asia-Pacific Markets, John Browning Jefferies Bank

SHANGHAI — Lower-than-expected economic growth and a downward drift in commodity prices will become more evident this year as China’s new leadership begins a rebalancing and remodeling of the economy.

The 7.7-percent gross domestic product (GDP) growth rate in the first quarter, slightly below anticipated levels, was partly to blame for a recent fall in copper prices and another round of reductions in analysts’ price forecasts.

But this is seen as just the beginning of a slowdown under which China’s government will be reluctant to intervene to prop up the economy unless absolutely necessary for social or political stability.

"We’re definitely seeing the end of the supercycle and we’re moving to a less investment- and production-intensive path," Ian Roper, commodities strategist at brokerage and investment group CLSA Asia-Pacific Markets, said. "Yes, China is still urbanizing and developing in the west, but the pace is slowing down."

The incoming leadership faces multiple challenges, including environmental problems, rising inequality, corruption, the constant threat of a housing bubble and the sniff of a financial crisis in local governments.

China’s top leaders released a statement April 17 affirming their commitment to "focus on the quality and profitability of growth," indicating that the senior leadership has reached a consensus to tolerate slower growth.

And China’s central bank governor said April 20 that lower growth would be the new normal, because the government had to sacrifice some GDP to ensure the economy did not become too unbalanced again.

The current macro context has combined with fairly weak seasonal demand for copper to generate a significantly more bearish mood on prices.

"I believe a different dynamic has emerged in China in recent weeks," John Browning, head of metals and listed products at Jefferies Bank, said.

One Singapore-based analyst said that a recent tour of copper fabricators in eastern China offered a fairly downbeat impression of their prospects for this year. "The demand side is looking pretty ordinary. It’s not astonishingly gloomy, but there is no real optimism," he said.

"It now seems clear that growth in China has moved to a structurally weaker pace," Credit Suisse Group analysts said in a research note. "We feel that this recognition, coupled with the likelihood that the European road to recovery will be long and bumpy, is likely to see many industrial commodity prices move to a new, lower equilibrium."

A version of this article was first published by AMM sister publication Metal Bulletin.

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