JPMorgan closes bullish call on base metals as Chinese credit cycle slows

The smelter is melting copper on July 23, 2020 in Jinhua, Zhejiang, China.TPG | Getty Images News | Getty ImagesJPMorgan on Wednesday closed its bullish call for copper, aluminum and other base metals, predicting an end to the soaring rally enjoyed throughout 2020.In December, copper prices have hit seven-year highs, buoyed by improved economic sentiment on the back of successful Covid-19 vaccination trials and consistently strong demand from China. As of Wednesday morning in Europe, copper was trading at around $7,853 per ton.In their quarterly metals outlook, published Wednesday, JPMorgan commodities analysts suggested that while prices could have further to run due to sustained momentum from hopes of a U.S. stimulus package, the Chinese credit cycle has peaked earlier than they were expecting.”Our analysis shows that a slowing in Chinese credit over the course of 2021 will turn into a drag on base metals prices that will likely outweigh continued recovery in the rest of the world,” the report said.”Moreover, while there is potential for meaningful new sources of demand in the next decade from de-carbonization initiatives, we do not see these becoming a major factor over the next couple of years.”This leaves the market reliant on strong underlying Chinese demand, which JPMorgan believes is at risk given the slowing credit cycle, strengthening renminbi, and the withdrawal of some subsidies and stimulus policies.JPMorgan has turned “neutral” on base metals, which include copper, aluminum, nickel and zinc, and now forecasts that copper will deteriorate from an average of $7,700 per ton in the first quarter of 2021 down to around a $6,500 per ton average in the fourth quarter.The other base metals are expected to follow the same downward trajectory over the course of 2021, due to persistent levels of oversupply.”We previously expected Total Social Financing (TSF) — a measure of aggregate credit growth — to peak around 3Q21. However, it now appears that the Chinese credit cycle is already peaking this quarter, about nine months earlier than we previously penciled in,” JPMorgan strategists said.”To this end, November TSF growth slowed from 13.7% year-on-year in October to 13.6% year-on-year last month, the first deceleration since the outbreak of the pandemic.”JPMorgan now expects TSF growth to slow to 12% in 2021 due to a 2 trillion yuan ($310 billion) reduction in the 2021 fiscal deficit.”This in turn means that China’s credit impulse (defined as the gap between TSF growth and nominal GDP growth) will slow from 11% this year (the highest since 2010) to only 2% in 2021,” analysts explained.

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