China Concern Continues

There was yet more worrying economic data from China last week, including a fall in vehicle sales. Most metal prices improved, however, although gold failed to break through the much anticipated US$1,300/oz mark.

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Vehicle sales in China fell last year for the first time in 28 years, with sales down 4.1% to 23.8 million passenger vehicles. Overall sales, including trucks and buses, were down 2.8% at 28.1 million, with sales in December down 13% compared with the year earlier figure. China's consumer price index hit a six-month low of 1.9% in December, while the producer price index (a measure of wholesale prices) slipped to 0.9%, which is the slowest in more than two years.

In an additional sign of economic headwinds in China, there were declines in both imports and exports in December, and there was also a modest reduction in the growth of house prices. In response, on Wednesday last week, China's central bank injected a record Rb570 billion (US$84 billion) into the country's banking system in a further effort to boost liquidity and increase lending.

The relative slowdown in China is causing particular concern in Australia. The Australian dollar, often seen as a proxy for Chinese growth, fell 10% last year against the US dollar, which left it as the worst performing currency amongst the G10 nations. The Aussie dollar has improved 2.2% so far in January in reaction to China's efforts to stimulate the local economy.

Despite the ongoing concern over the global economy, last week was another good one for base-metals prices, although gold slipped back slightly. The best performer last week was zinc, up 3.5% to close in London on Friday at US$2,582/t. Nickel rose 2.1% to US$11,715/t after rising 3.8% the previous week. Iron ore (62% Fe) improved 1.7% to US$76.0/t, aluminium strengthened 1.4% to US$1,865/t and copper rose 0.9% to US$6,017/t.

Gold slipped 0.1% last week to close on Friday at US$1,291/oz in London. Nevertheless, the precious metal has risen 10% since its low in August last year. This makes gold amongst the best performing metals over the past five months, and reflects the increased anxiety of investors about the state of the world economy since the middle of 2018. This is reflected by the amount of physical gold in exchange-traded funds, which has risen to 71.9Moz, close to the record high of 72Moz reached in May 2018.

The performance of gold will have been a factor in Colorado-based Newmont Mining's US$10 billion offer last week for Canada's Goldcorp. The deal will create the world's largest producer, replacing Toronto-based Barrick Gold, which announced a US$6 billion acquisition of Randgold Resources last September. Analysts expect further mergers and acquisitions this year as the industry looks for greater corporate consolidation and cost savings.

The assets under management by hedge funds declined last year for only the second time in more than two decades (the other year was 2008); investor redemptions have accelerated and the industry lost money in the volatile trading conditions. Actively-managed funds generally saw heavy outflows as retail investors reacted to poor performances and the market uncertainty. In contrast it was a record year for the cheaper passive funds, which simply mimic specified segments.

Good news last week included a positive note on the global economy from Larry Fink, the founder of Blackrock. Mr Fink admitted there were "many reasons to be worried" but argued that the gloom has been overdone. He noted that investor skittishness is natural, given the stresses in Europe and China, and the anticipation of a slowdown in the US, coupled with the rise of populism, Brexit and the US government shutdown. Nevertheless, Mr Fink sees few signs that the global economy is heading for a downturn, saying "2019 feels good to me".

In the meantime, the shutdown of the US government has continued. One of the Federal Reserve's top policy makers, John Williams (head of the New York Fed), gave a warning of the risk to the country's economy of the closure of government activity. Financial institutions are becoming more cautious in their lending because of the difficulty in securing security checks and financial clearances.

Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.