Metals Slide on Global Growth Concerns

By Ira Iosebashvili and Yifan Xie Features Dow Jones Newswires

Chinese metals prices tumbled on Thursday, dragging down resource prices around the world amid worries that demand for commodities like steel and iron in the world's No. 2 economy is weakening and inventories filling up.

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The closely watched price of iron ore traded on the Dalian Commodity Exchange closed down 8%, the daily trading limit, at 485 yuan (US$70.33) a ton, extending losses after a four-day rally was reversed on Wednesday.

In Shanghai trading hours, hot-rolled coil futures also dropped by the daily maximum of 7%, while steel-rebar futures plunged 6.2% to 2,931 yuan a ton, wiping out last week's gains.

Those declines rippled across the world. In London, nickel fell 2.4% to $9,010 a metric ton and copper was down 1.2% to $5,524 a metric ton, a drop that followed the metal's largest one-day decline since 2015.

"The discussion we're having about copper this morning is around tightening liquidity conditions in China," said Bjarne Schieldrop, chief commodities analyst at SEB Markets. China accounts for half the demand for most base metals.

Most metals were taking their cue from iron ore, Mr. Schieldrop said.

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Iron-ore and steel rebar prices are down about 20% from four-year highs reached in March. Behind the tumble are fears that expected demand for infrastructure and construction projects in China -- long a pillar of global commodities prices -- may not materialize as expected.

The already weak investor sentiment got a fresh hit on Thursday after six government agencies pledged to curb runaway local-government debt by stricter oversight of the projects they are pumping money into. Many of those projects are private-public partnerships that fund the construction of infrastructure projects such as bridges and dams.

"This is beyond market expectation and exacerbated the correction in iron-ore futures, which was already vulnerable due to a supply-and-demand mismatch," said Ye Yanwu, research director at Shanghai-based Chaos Ternary Futures Co.

Investors had been betting on a pickup in partnership projects to lift demand for iron ore and other commodities, analysts said. But adding to the pressure on metals, supply has been climbing lately amid a sharp increase in imports after China's Lunar New Year holiday in February and increased domestic production since the start of year price rally.

The supply picture became more negative this week with bad news from the London Metal Exchange, whose warehouse inventories across Europe and Asia swelled by 64,000 tons, or 25%, over the course of Wednesday and Thursday, according to Commerzbank research. That reverses most of the 80,000 tons withdrawn from Shanghai Futures Exchange warehouses during April, the bank said. Wednesday's steep declines in copper in New York and London were sparked by inventory numbers.

Investors have become increasingly nervous that the biggest driver of the demand for base metals, the Chinese economy, will slow later this year. Those concerns came following weaker-than-expected manufacturing data released this week, with the nation's factory sector growing at the weakest pace in seven months in April as demand lagged behind.

Meanwhile, tightening financial regulations are adding pressure on the real economy and demand for commodities, analysts say. Chinese leaders recently stepped up their rhetoric on safeguarding financial security, as the ruling Communist Party approaches a key five-year transition this fall.

"Price movements in metals commodities are still largely driven by speculation, which has been hit hard by the central government's repeated calls for financial deleveraging," said Fan Qingtian, an analyst at Nanhua Futures Co.

"I don't think that the risks have been fully squeezed out and commodities may head down further," he said, adding that investors should stay cautious due to uncertainties over the extent of production capacity cuts of metals in the country.

The fall in metal prices dragged down the shares of those who mine them. Glencore PLC was down 2.8%, Rio Tinto PLC fell 1.9% and Vedanta Resources PLC was down 5.3%.

Precious metals were also lower on Thursday, mainly as concerns over geopolitical risk subside, analysts said.

"The market is quick to forget what actually took the price higher in the first place, namely Syria, North Korea, and the overall Trump presidency.... none of these things have gone away," said David Govett, at Marex Spectron.

Gold traders will be looking to Friday's U.S. nonfarm payrolls jobs data for signals about Federal Reserve interest-rate increases, but will also be monitoring the final round of Sunday's French presidential election, in case that raises further political risk.

Among precious metals, silver eased 0.6% to $16.35 a troy ounce, platinum slipped 0.1% to $869.45 a troy ounce, and palladium dropped 1.1% to $791.18 a troy ounce.

-- Yifan Xie and David Hodari

Metals prices slid to their lowest levels in months Thursday, amid worries over growth in China and the U.S.

Declines began on Chinese exchanges and rippled around the world. The closely watched price of iron ore traded on the Dalian Commodity Exchange closed down 8%, the daily trading limit, at 485 yuan (US$70.33) a ton. Nickel fell to its lowest level in nearly a year in London, while copper tumbled in the U.S.

The selloff is an alarming sign to some investors, who view demand for base metals -- which are used to make everything from bridges to smartphones -- as a barometer for global growth. Prices for copper and other metals have already given back most of a late 2016 rally that came on hopes of more dynamic expansion in the U.S. and abroad.

Investors "who were hoping for a repeat of last year's positive performance are turning tail and running," said Sameer Samana, global quantitative strategist at Wells Fargo Investment Institute.

Money managers are concerned that demand for raw materials from China may be weakening, as regulators crack down on borrowing and the effects of a massive government stimulus fade. China accounts for around nearly 50% of global demand for copper and other base metals.

They have also turned cautious after a spate of weak data in the U.S., including disappointing economic growth in the first quarter and weak consumer spending last month. At the same time, many now expect the White House will have a difficult time passing fiscal legislation that would boost commodities demand, such as increased infrastructure spending.

Net bets on copper by hedge funds and other speculative investors hit their lowest level since November last month, data from the Commodity Futures Trading Commission showed.

Mr. Samana said he took profits in base metals, oil and gold at the beginning of the year, believing the rallies in those assets were unlikely to continue.

The already weak investor sentiment got a fresh hit on Thursday after six government agencies pledged to curb runaway local-government debt by stricter oversight of the projects they are pumping money into. Many of those projects are private-public partnerships that fund the construction of infrastructure projects such as bridges and dams.

Copper for July delivery closed down 1.3% at $2.5115 a pound on the Comex division of the New York Mercantile Exchange, its lowest settlement since Jan 3. Nickel fell to $9,015 a metric ton in London, its lowest close since last June.

Supply concerns have also weighed on prices. Inventories of copper in London Metal Exchange warehouses across Europe and Asia by 64,000 tons, or 25%, over the course of Wednesday and Thursday, according to Commerzbank research.

In precious metals, gold for June delivery fell 1.6% to $1,228.60 a troy ounce, their largest one day decline of the year.

A bevy of political risks that worried investors in April have receded in recent days, giving them less reason to hold the safe haven metal.

A strong showing by centrist Emmanuel Macron in French presidential elections last month eased worries about a populist surge that threatened to bring anti-euro candidate Marine Le Pen to power. A second round of voting will be held Sunday. Investors are also less concerned that tensions between the U.S. and North Korea will escalate.

"The worriers look around and they don't see anything worrying on the horizon right now," said George Gero, managing director at RBC Capital Markets.

--Daivid Hodari contributed to this article.

Write to Ira Iosebashvili at ira.iosebashvili@wsj.com

(END) Dow Jones Newswires

May 04, 2017 17:04 ET (21:04 GMT)