A new note to investors from Goldman Sachs on a price decline in the Chinese metals market asks a key question for people who are worrying about what the “Great Stall of China” is going to do to the rest of the global economy. If China is growing, why are metals prices in decline?
Here’s the background: The China government says GDP is about 7% a year. Outside observers suspect it may be as low as 4% in reality. Either way, that’s still pretty good growth in an economy of that size.
But China’s stock market is collapsing, it has a massive debt overhang, objective indicators like electricity consumption look soft, and the country is about to go through a generational reversal that will erase its population growth advantage.
Goldman analyst Max Layton and his team track China prices through their Metals Consumption Index, which records physical output of new metal.
Here is the problem in short term. Demand has gone down while supply keeps on going up.
And here is the problem in the long term. Metal prices track industrial production generally, but they recently collapsed:
Goldman predicts a “hard landing” for metals this year. Layton et al. are not hopeful for the rest of the year, because credit is likely to get tighter there:
More broadly, with credit growth still running at roughly double the rate of GDP growth, China is likely to continue to slow credit growth over the medium to long term. As such, any major credit-led pick-up in Chinese metals demand growth and prices is likely to be short-lived, in our view. The prospect of further slowing in credit growth and metals demand, and the follow-on impact on producer-country currencies and cost support, suggests the risks surrounding our medium-term metals demand growth and price forecasts remain skewed to the downside.
Put another way, this does not look like an economy that needs a whole lot of new metal any time soon.
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