The Hindu Business Line : China demand growth boosting metal prices

Much has been debated about the causes of price action in base metals, with both supply and demand factors impacting the market. While supply uncertainties and falling inventory levels are often cited as reasons for firming prices, rapidly expanding demand for base metals across the world, especially in China to boost infrastructure development, has contributed significantly to upward price movement. Funds too, have played a key role taking cue from demands-supply dynamics.

Expanding output

Indeed, supplies have actually responded to rising prices, notwithstanding constraints. Production of copper, nickel and zinc has substantially expanded last three years. However, key to market prices has been a phenomenal spurt in demand from China which remains the main market driver.

In other words, it is because of the rapidly accelerating demand growth so far that the supply side of the base metals industry looks tightly stretched.

Moving into the third quarter, a temporary easing in Chinese demand (plus the usual seasonal weakness) suggests that downside price risk exists in most metals markets, according to a report from Barclays Capital. However, this should prove temporary and a strong recovery in the fourth quarter is expected, the report asserted.

EXCEPTION

Lead may prove an exception to this pattern. Its fundamentals are tightening and point to significant upside risk over the next few months.

Going forward, Barclays expects to see base metals producers struggling to keep up with higher average demand growth rates. Inventories will stay low, markets will remain vulnerable to supply disruptions and prices will stay high and volatile.

Outlook positive

Given the robust GDP and manufacturing sector growth, Chinese demand is unlikely to fade anytime soon. Therefore, the medium-term outlook for metals is positive. Average consumption growth rate for base metals in China has been anything between 3 and 8 times the world average in the last six years. In the first quarter of 2007, it has been even higher.

Very clearly, the balance of economic growth is tilting towards Asia. With it, the ability to influence the metals market has shifted from the western world to Asia. It is likely that India will soon begin to start consuming significantly larger quantities of metals if growth in housing and proposed investment in infrastructure is any indication.

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