From a year of political upheaval the metals markets can draw one all-important lesson. Beijing's economic policy U-turn around this time last year may not have resonated across the world in the same way as Britain's vote to leave the European Union or the US electorate's vote for Donald Trump as its next president. But in the world of industrial metals it has proved just as defining an event, upending expectations and transforming the price of everything metallic from aluminium to zinc.
And next year it's going to be all about China as well, with lots of potential for more surprises. This time last year London copper was trading just above $4,500 per tonne, its lowest level since the Global Financial Crisis of 2008-2009. And that other industrial bellwether, iron ore, had fallen below $40 per tonne for the first time since anyone even thought in terms of a spot iron ore price.
The metals industry was in despair. The "supercycle" was over. Beijing had said so. The days of fixed asset investment were to give way to a "new normal", one characterised by the consumer not the construction business. But then Beijing changed its mind. Faced with fast-slowing economic growth rates, it quietly reverted to its "old normal". The spending taps were turned back on. Government largesse was once again channelled back down the tried-and-trusted pathways of infrastructure and property construction.
Real estate investment had been slowing for two years. By February the trend had reversed. So too had that in newly started floor space. The primary engine of Chinese growth, and of industrial metals usage, was being fired back up again. The funny thing is that no-one outside of China initially noticed. Everyone had taken Beijing's policymakers at their word.
As late as March, Andrew Mackenzie, chief executive at BHP Billiton, was ruefully saying that while the company "anticipated emerging trends that signalled the end of the boom, we didn't expect the scale and the speed with which it happened." By which time the London Metal Exchange index of base metals had already bottomed out and iron ore had recovered to above $60 per tonne. Well, someone at least had noticed. It's just they weren't on anyone's radar.
Retail Chinese investors were stampeding into the local iron ore and steel futures markets. Volumes mushroomed and prices rocketed. On Monday March 8 the physical spot iron ore price rose by a staggering 20 percent to $62.60. And it did so first and foremost in reaction to what was happening to local exchange prices.
Animal spirits? Irrational exuberance?
Everyone thought so, not least the Chinese authorities who raised margins and trading fees to chase the retail crowd out. But with hindsight the crowd had made a good, albeit collectively chaotic, call. The iron ore price today is trading just shy of $80 per tonne. Fast forward eight months and the crowd has been making a similar upside call on base metals.
On the Shanghai Futures Exchange (ShFE) aluminium volumes last month recorded an all-time record high. Zinc volumes were the second highest on record. So too where those for tin. And as for lead! Over 10 million tonnes traded in November, equivalent to almost the entire global market's annual tonnage. All have seen sharp price spikes. Once again the Chinese authorities are pulling all their margining and fee levers to tame the animal spirits.
The ShFE warned its members last month to be "well prepared for risk prevention" and to "remind investors to prudentially judge information from the market and make rational investment". But what if they are making a rational investment, just in an irrational way? And if they are, what do they know that we in the West don't? One thing's for sure, no-one trading base metals can any longer ignore what has been dubbed the "on-shore casino".
Where once Chinese fundamentals shaped the price, now it's both fundamentals and funds. And there are a lot of funds in China. Beijing, meanwhile, is now trying to control the effects of its own policy. "Houses are for people to live in, not for people to speculate," read a statement issued by top policymakers at the end of the Central Economic Work Conference. Stimulus feeds growth but it also feeds property bubbles in the top Chinese cities. Stimulus must therefore be withdrawn or at least redirected.
We've seen this movie before. This policy cycle has played out several times over the last few years. The best bet is that the taps will be turned off but that the tail winds will still blow hard over the first part of 2017, supporting metal prices at their new elevated levels.
By the second half of the year, it's quite possible that everyone will be talking again about a hard landing in the Chinese metals sector. But there's one new potential Chinese driver for metals prices. Well, not exactly new. Cities such as Beijing have for years been choking on the smog spewing from the country's huge industrial production sector.
It's getting appreciably worse, though. Environmental authorities last week advised 23 cities in the north of the country to issue red alerts, the highest possible air pollution warning. It's not as if Beijing has been sitting idly by. Environmental inspection teams have been touring the country, ordering closures and remedial action by offenders.
And, critically, any remaining ties between environmental agencies and local governments will be severed by the end of this year to avoid what the official Xinhua news agency termed corruption and conflicts of interest. Beijing, in other words, is finally starting to get tough in its self-declared "war on pollution". And it's going to get tougher still with unpredictable consequences for its massive metals production sectors.
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