Stimulus or Bust
Since we have exited the global pandemic, commodity bulls have been shouting from the rooftops that we are headed for continued all-time highs across the entire complex. A large driver of this has been the expectations that China would release a torrent of stimulus in order to make dramatic improvements to infrastructure. However, since the release of China's 14th five-year plan, there has instead been a focus on social inclusion and equity rather than wealth building. While this plan will have many benefits for the average person in China, it has come at the detriment to those that were expecting the cash floodgates to open. The ultra-wealthy in China have actually been the target of several recent crack-downs directed by President Xi which has led to large numbers of high-net worth individuals actually leaving China.
While focusing on the middle and lower class can be looked at as admirable for a country that for the past two decades seemingly focused on growth above all else, it has clearly had a negative impact on consumption. You don't have to look further than the Chinese property market. At its peak in 2021, the real estate sector accounted for 25% of China's entire GDP and 38% of government revenue. Cities were being built left and right with the expectation that money would continue to flow into projects from central and local governments. However, as the recent trials of property developers like Evergrande have shown us, there is only so much support the central government is willing to provide. When the largest property developers in China fail to make bond payments, the world (and the markets) take notice. Not only for a fear of contagion where foreign investors won't receive promised funds, but from a larger picture - the single greatest driver to China's recent growth may be coming to a halt. A lot of those cities that were built are now ghost towns, with half completed skyscrapers, roads that aren't connected to anything, and rusting construction vehicles, with no signs of project restarts. Given the raw materials that are necessary to support the sector, even a small downturn can have dramatic negative effects on the global supply/demand pictures.
That's not to say that China has not attempted anything to solve these issues, but whether it is a small cut in the borrowing rate, a reduction in the reserve requirement ratio (RRR) for banks, or bond issuances, since we have exited Covid we have yet to see the kind of 'whatever-it-takes' announcements that would help propel China's economy (and therefore global demand) to new, sustained highs. Even the most recent announcements where the stimulus package was estimated to be up to 7.5 trillion yuan ($1.07 trillion), only led to a short-lived rally across commodities as when it came to the actual details of the package, it did not live up to expectations. In addition, the recent economic data coming out of China has also fallen short and there are those questioning if the current stimulus will be enough to ward off a deepening crisis.
China has another problem other than their flailing property market and infrastructure (though it is linked) - youth unemployment. The current unemployment rate for people aged 16-24 in China is 18.8%, up from 17.1% in July and 13.2% in June. The promise of a high-paying job for graduates has all but disappeared and it has left a large portion of the youth in China with very few options. With an entire generation struggling to add to productivity, China will need to focus a lot of attention and resources to solve this issue before it deteriorates even further. Adding to the problem is China's aging population. It's estimated that by 2040, 28% of China's population will be aged 60 and older (compared to the US that currently hovers around 17%). with almost 20% of young adults unable to find work, and another +20% of adults too old to work, you can see why the markets are getting increasingly nervous about China's ability to 'turn on the taps'.
Now, this is not to say that China is suddenly a lost cause. Even with their current struggles, they are still the largest consumer of raw materials in the world and should the central government decide to unleash more and more stimulus things could very quickly turn around. But with the energy transition also taking time to fully develop (EV sales for example are dramatically down vs expectations) the catalysts that were supposed to propel metals to continuous new highs have just not been maintained. With fears about global recessions and inflation still simmering near the surface, long term rallies are going to be hard to sustain.
Most metals are currently trading near the same levels and in the same bands they have been for the majority of the past four years. Yes we have seen some vicious spikes to all time highs along the way but these have been relatively short-lived with rallies typically sold into and losing steam before long. Repeated 'buy the rumor and sell the news' trading has brought us back down to reality time and again. However, dips are also bought into with most market participants feeling it is a case of when, not if, we take the next steps toward dramatic increases in global consumption, and so it is deemed there is long-term value to be had any time prices come off significantly. For now it feels like the pattern of choppiness and range-bound trading is set to continue.
