Covid-19-linked lockdowns in the world’s largest consumer of metals, China, is impacting the demand for metals, resulting in lower metal prices, albeit metal prices are expected to remain above pre-Russia-Ukraine conflict in general, according to Fitch Solution Country Risk & Industry Research.

Confirming the rebound, the market analyst maintained its 2022 metal price forecasts. With an optimistic lens, Fitch expects Chinese demand to pick up in H2 2022, which will bring more stability to metals prices.

Fitch added that the lockdowns in China, are also acting to restrict supply. As the world’s largest producer of metals, the restricted metal’s supply is expected to drive prices to a balance in the coming months.

“Further lockdowns, either district-wide or full, have been imposed in more than two dozen cities around the country, with the capital Beijing having undergone three rounds of mass testing since late April. We continue to see downside risks to our 4.5% growth forecast for 2022, depending on further developments around lockdowns.”
Fitch

Covid-19 Lockdowns to Continue

In a base case scenario, the market analyst said it expects the lockdowns to spread to more geographies and remain in place through Q2 2022, severely weighing on economic activity and particularly affecting the retail and services sectors.

Based on reports, the outbreak is spreading to other parts of the country, with rising infections in Suzhou, a neighboring city of Shangai, while Taiyuan city, the capital of Shanxi province in lockdown to contain a worsening outbreak.

According to Fitch’s macro team, China will experience further contractionary readings in both manufacturing and nonmanufacturing purchasing managers’ indexes in the remaining two months of the second quarter.

Fitch expects continuing loose fiscal and monetary policy in China through 2022 to help stimulate economic activity and growth, which should underpin demand for metals, particularly from the construction sector.

“We at Fitch Solutions expect the Chinese authorities to maintain loose monetary policy through 2022 in order to support economic activity, after the People’s Bank of China cut the reserve requirement ratio by 25bps for all banks on April 15.”
Fitch Solutions

Gold Price Forecast

On the one hand, Fitch expects the Russian invasion of Ukraine to keep gold in the range of US$1,900 to US$1,800 per oz. in 2022 and 2023. The market analyst noted the deepening war situation has sparked an uptick in demand for the safe-haven asset as “investors adopt a risk-off sentiment”.

On the other hand, the US Federal Reserve’s normalisation of monetary policy, recovering bond yields, strengthening dollar, as well as the continued easing of restrictions as vaccination rates continue to rise will put a lid on gold prices.

Fitch noted that, while it expects significant price volatility going forward especially as the conflict in Ukraine evolves, gold prices will remain elevated in the coming years compared to pre-Covid levels.

“While gold prices are hovering near their all-time high of US$2,075 per oz and will be mainly dictated by the war in the coming months, we expect US dollar strength and recovering bond yields to cap gold’s rally.”
Fitch