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Metals road to recovery will take time

Industrial output fell year-on-year in China for only the third time in the history of the data.

"Our latest reading of the Citi China Copper End Use Tracker (CCET) points to end use consumption declining by 9.4% year-on-year to levels below pre-COVID (2019 average) levels," Citi said.

"These run-rates imply copper and aluminium have shifted into surplus globally in April (aluminium as much as 3-4Mt annualised), and it will likely take some time for the balances to tighten back up again.

"Luckily for bulls and the producers, the surplus is contained in China for now, either because of logistical constraints or because it has already been turned into products."

Citi remains bearish near-term and expects copper to fall to US$8500 per tonne in the next three months, about $1000 below its current price.

It also sees aluminium dropping to $2700/t, nickel to $25,000/t and zinc to $3300/t.

Aluminium is currently sitting at about $2900/t, nickel at $27,700/t and zinc at $3800/t.

"We don't think the degree of the weakness in China can be fully explained by the lockdowns and believe the economy has been deteriorating in the absence of sufficient government easing," Citi said.

"We continue to recommend selling rallies until China gets ahead of the curve and/or until the Fed starts to deliver ‘dovish' hikes."

The bank's China economists believe the worst could be over for the country but a "timely and decisive" roll-out of stimulus measures would be critical to get the economy back on track.

"Heading into 2023, we remain very concerned about the impact of the expected circa $7 trillion dollar commodity shock on the global economy (2022 forecast relative to 2019)," Citi said.