China optimism boosts sentiment

Optimism over China’s reopening helped boost sentiment across the complex, aided by a weaker USD supporting investor appetite.

Base metals rose sharply on optimism over China’s reopening. China’s government is said to be considering CNY3.81trn of local government bond issuance in 2023. This is likely to be focused on infrastructure spending. Beijing may also bump the budget deficit to 3% of GDP, up from 2.8% last year. Guo Shuqing, party secretary of the PBoC, said China will return to normal growth soon as it steps up support for households and businesses. This comes amid a backdrop of low inventories. Copper inventories for immediate withdrawal from LME warehouses fell 2.8%, the most since 8 December. That leaves stockpiles at just above a 17-year low. Nickel bucked the trend to end the session lower after producer Tignshan said it was in talks with local plants to produce refined nickel, a plan that could double China’s production.

Gold extended gains amid expectations that the Fed will become less hawkish this year. The US reported an unexpected contraction in services activity and a slowdown in wage growth. A weaker USD also supported investor demand. Physical demand from China is strong, with central bank buying prominent.

Renewed hope of increased consumption in China pushed up crude oil prices. China issued a fresh batch of import quotas, a signal that the world’s largest importer is ramping up to meet higher demand. Easing COVID-19 restrictions have already boosted travel. Some 34.7m trips within the country were made on the first official day of the Spring Festival travel rush, according to the Ministry of Transport. That’s more than 40% above comparable days in 2022. Roughly 2.1bn trips are expected over the 40-day period. This comes amid tightening supplies. Russian oil exports edged up last week but are showing little sign of reversing the recent downward trend. Combined flows to China, India and Turkey hit their lowest level since October. Russia’s Urals crude is trading at just USD38/bbl, significantly below the recent G-7 price cap.

European natural gas prices rallied amid concerns LNG shipments will head to more profitable regions such as Asia. Mild weather has curtailed demand in Europe so far this heating season. However, much of the winter remains. Europe is heavily reliant on LNG imports which will be required to refill inventories. With Dutch front month futures down more than 50% since November, US LNG exports are now more profitable to Asian in February and March. The gas spread between Asia and Europe for that period is now at USD6.66/MMBtu and could widen on increased demand from China. North Asian LNG spot prices pushed higher after China Meteorological Administration warned that an expected cold snap at the end of January could challenge the country’s energy security efforts.