China's stimulus could spark a base metals rally, say experts

Metal prices have seen a significant correction in the last six months. However, experts opine that the worst is over for the sector and any indication of stimulus from China may trigger a rally in base metals.

According to Kunal Shah, head of commodities research at Nirmal Bang, the downside risk in all base metals appears to be minimal. While providing a ray of hope for investors, he emphasises that more than 45-50 percent of base metal consumption comes from China.

Therefore, any indications of stimulus measures in the country are likely to trigger a rally in base metal prices, offering potential opportunities for market participants, Shah said.

"More than 45-50 percent of consumption of base metals comes from China. China has cut its interest rates, but that is not enough. So there is anticipation building that there is going to be strong action from China as far as stimulus is concerned.

I am of the very firm view that the downside in all of these base metals seems to be very limited. All the negative news pertaining to China has already been priced in. So any signs of stimulus will lead to a rally in base metal prices. So I am quite optimistic when it comes to metals," Shah said.

In June, China's central bank lowered its short-term lending rate as the economy's post-pandemic recovery continued to lose momentum. The People's Bank of China lowered the seven-day reverse repurchase rate by 10 basis points to 1.9 percent. It was the first reduction in the rate since August 2022.

Pritam Patnaik, the head of commodities at Axis Securities also concurs with Shah that any stimulus or positive news originating from China could have a substantial impact on metal prices.

He specifically highlights his confidence in copper within the broader metal space, suggesting that it may be an attractive investment option for those looking to capitalize on the potential growth in the commodities market.

China's June factory activity contracted for the third month. The country's official manufacturing purchasing managers' index (PMI) for June came in at 49.0. It was 48.8 in May and 49.2 in the month prior, according to the National Bureau of Statistics data. A reading more than 50 points at expansion in activity, while less than 50 suggests a contraction. The PMI, which is considered a leading economic indicator, shows China struggling to sustain the post-COVID recovery seen earlier this year amid an entrenched property downturn, high youth unemployment and deflationary pressures.

Anuj Gupta, the vice-president of IIFL Securities, shares a similar bullish sentiment on base metals. Gupta argues that as the Chinese economy grows, the demand for base metals will increase correspondingly. This anticipated surge in demand can be seen as a promising factor for base metal investors, as it may translate into upward price movements in the commodities market.