UPDATE: China July Metals Output Eases, Signaling Slowdown

China's output of key industrial metals slowed on month

-- Copper output posts a record due to tightening fundamentals

-- Inflation worries continue to place producers in a quandary

(Adds analysts' comments, details on base metal output in July, inflation data and context on trend of China's crude steel production.) 
   By Chuin-Wei Yap
   Of DOW JONES NEWSWIRES
 BEIJING (Dow Jones)--China's production of key industrial metals, including crude steel, aluminum, lead and zinc eased compared to a month earlier, as inflation worries and sector-specific oversupply weighed on producers.

China's metals output is a barometer of industrial strength, which has increasingly come under pressure from a hawkish domestic monetary policy and sliding global growth.

While crude steel output in July rose 15.5% from a year earlier to 59.3 million metric tons, the level was a 1% decline compared to June, the National Bureau of Statistics said Tuesday. The daily average output reached 1.91 million tons in July, down from a record 2 million tons in June.

"We believe most Chinese steelmakers have tipped into the loss-producing column," given high iron ore and coal prices in July, Steel Market Intelligence said in a note.

The slight slowdown was expected, based on preliminary July data issued earlier this month by the China Iron and Steel Association.

The data underscored signs of weakening demand, coming after steelmakers had run their mills near full capacity in recent months, pushing daily output to a record high in June even as steel product prices fell.

Still, the country is awash in oversupply. In the first seven months of 2011, China produced 410.36 million tons for crude steel, up 10.3%.

Aluminum production fell 2.7% on month to 1.55 million tons. Zinc output fell 20% to 425,000 tons while lead output fell 21%--amid a government crackdown on battery makers--compared to June.

Copper production reached a record 478,000 tons, up 18% on year.

"Copper's fundamentals have tightened after key producers reported output declines in the first half," Standard Chartered analyst Judy Zhu said.

The slowing output of industrial metals comes amid signs that China's inflation unexpectedly accelerated last month, raising concerns the country may be unable to respond to weakening global growth by loosening its monetary policy--which tightens the quandary faced by the commodity sector.

China's consumer price index for July rose 6.5% from a year earlier, up from June's 6.4% and the fastest rate of inflation in more than three years, the bureau said Tuesday.

"Despite the softening influence of lower commodity prices, inflation will remain higher than target, narrowing the policy space for an easing of monetary policy as growth slows into the back of the year," IHS Global Insight said in a research note Tuesday.

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