A waning Chinese property/construction sector may further impact copper prices; forecasts for El Nino have repercussions for commodity markets; and
-Chinese property to weigh on near-term copper prices
-Looming El Nino to impact commodity markets
-More reasons for
Chinese property to weigh on near-term copper prices
Significant uncertainty hovers over the Chinese property/construction sector and how conditions play out over the next few months will likely determine the direction for copper prices.
Construction typically accounts for around 20% of total Chinese copper demand.
Copper and Chinese real estate equity prices have become closely correlated over the last 15 months, and Longview Economics suggests both prices are at risk of material falls in the coming months and quarters, in the absence of meaningful government support.
In an attempt to ward off a major collapse in housing completions, the Chinese government has been providing support by various means, yet Longview points out policymakers are reluctant to overstimulate the real estate market.
This balancing act has resulted in flat average house prices in
Worryingly, in the past few weeks, defaults and delinquencies for major property developers have picked up again, notes Longview, and pushed US dollar high-yield bond prices to the lowest levels since late 2022 (yields rise when bonds are sold off).
Longview highlights the Chinese government is faced with challenges across four key parts of the real estate market: land sales; transactions; construction activity; and completions.
In
Unfortunately, Chinese land sales have been broadly flat over the past five years, resulting in considerable pressure for local government revenues, particularly in the past two years, explains Longview.
Moreover, because local governments have turned to local government financing vehicles (LGFVs) for financing, Longview suggests organic local government revenue via land sales is likely to be much lower than suggested by the official data. As a result, local government's ability to fund construction of infrastructure projects has been impacted.
On average, it's taking 26 months to sell a house/apartment in
Now, forward looking liquidity indicators, a key driver of transactions, suggest further weakness in purchases is likely over coming months.
Adding to the general woe, residential and non-residential construction investment is down almost -50% from 2021 highs.
One bright spot is a high level of (government-assisted) completions which, according to Longview Economics, is helping prevent a collapse in the real estate sector, yet there remains significant risk to buyers/developers and the Chinese housing market in general.
Looming El Nino to impact commodity markets
Over the past 40 years there have been four strong El Nino events, each with significant impacts, highlighting the importance of the recent onset of El Nino conditions, as recently declared by the
Last week, the
As a result of these forecasts,
The bank expects the largest impacts will be felt in the energy markets of
El Nino could also cause a cold dry winter in
Regarding oil, the forecast weather pattern is unlikely to have a material impact on demand. The bank explains demand is more driven by transportation dynamics, but El Nino could hit oil production, given a subdued
The biggest impact of El Nino tends to be on agriculture, explains ANZ, as droughts in
El Nino typically brings drought to the western Pacific (including
Demand for gold could be impacted as lower revenue from reduced crops in
There may also be an increased level of disruptions to supply in other metals markets. The bank suggests copper from
While the analysts see a range of potential impacts on commodity markets, secondary effects on shipping and transportation can also impact prices of commodities transported by sea.
Higher prices for energy-related commodities in past
More reasons for
Mineral sands consultant, TZMI, expects weaker demand for titanium dioxide (TiO2) feedstocks on a shaky global macroeconomic outlook, along with growing supply, and forecasts prices will remain range-bound around
The consultant's industry outlook has made UBS marginally more negative, while also lending conviction to its mid-June move to downgrade Iluka Resources ((ILU)) to Sell from Neutral. The broker's
TZMI expects global pigment demand growth for 2023 and 2024 will be below long-term growth rates, resulting in weaker demand for TiO2 feedstocks. The consultant also sees overall TiO2 feedstock supply growing due to increased concentrate imports from
Iluka is a producer of zircon and high-grade titanium feedstocks, rutile and synthetic rutile, with the latter having a lower TiO2 content.
Illuka acts as a market leader, observes
TZMI is similarly cautious on the zircon outlook given the onset of new supply from
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The project commenced sales of HMC in the March quarter and
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