China easing to help struggling metals processors

China's decision to cut the cost of bank loans could mildly stimulate demand from downstream metals processors, especially from smaller firms struggling with tight credit, but weak demand and excess supply of some metals could dampen the effect.

China cut benchmark lending rates for one-year loans by 0.27 percentage points to 7.20 percent on Monday, the first such cut in the cost of bank loans since February 2002.

Against a background of acute stress in global financial markets, the central bank also lowered the reserve requirement for all banks, except the five largest and the Postal Savings Bank, by 1 percentage point.

Small processors and exporters had struggled this year to get loans on which they depend to ease their cash flow, and had often turned to importing metals as a way of accessing funds, because they could more easily obtain credit lines for imports.

"Looser monetary policies had been bandied about but we hadn't expected anything to happen this fast," said Cai Luoyi, an analyst with China International Futures in Shanghai.

"Small and medium firms had been doing financing trade a lot this summer, because they couldn't get loans. Already, that has fallen off a bit because localities have relaxed bank loans to SMEs."

Metal demand could improve for the reminder of year in China, the world's top market, which has seen weaker-than-expected growth this year partly due to shrinking orders from small and medium-sized processors.

But any pick-up could be offset by the turmoil in U.S. markets, which both planners and businessmen fear could dent demand for Chinese exporters.

"The measures would help aluminium fabricators a bit. But we expect the market to remain sluggish for the rest of this year as demand is weak," said a manager at an aluminium fabricating plant in Nanhai city in Guangdong province, home of hundreds of such plants.

Some of those plants have already closed and sent workers home, said Cai, making an immediate revival of demand unlikely especially if demand for semi-fabricated aluminium products from the United States falls, reflecting the weaker financial sector.

Careful fabricators are asking for advance payment in cash or letters of credit from the U.S. customers, which could reduce orders, the manager said.

"We'll take U.S. orders only when we see the money," he said.

FIGHTING FOR FINANCING

Unable to access bank loans, companies that needed cash had turned to the financing trade because they had an easier time opening a letter of credit for imports.

Such moves also allowed importers to take advantage of the appreciating yuan. But when the yuan's appreciation slowed this summer, it closed off one more avenue for importers to access credit.

The financing trade explains some of the buoyancy in Chinese metals imports even when local spot markets stay soft. Copper was the favorite in the first quarter, until a deep discount in domestic markets pushed traders to zinc, nickel and lead.

The refined zinc trade in particular created a domestic glut that forced some local smelters to reduce operations.

"There is way too much supply of aluminium and zinc for a credit easing alone to let the market pick up. But copper has a more stable market situation," Cai said.

"In fact, if it weren't for the financing trade, copper would be quite tight by now."

The quicker appreciation in the first half allowed traders, in particular those handling copper and iron ore, to book cargoes in dollars and then trim their costs as the yuan strengthened.

"Small and medium-scale processors should be encouraged by Monday's policy," said an analyst in Beijing. "Their profits have been hurt seriously as tough cash positions prevent them from expanding and even forced some to downsize."

Major firms, many of whom access credit through long-term agreements with big banks, would not be impacted, she said, adding that she saw the move as an adjustment, not a reversal, of tight monetary policy.

"We look at Monday's cut as a correction to previous policies that have forced many small players to quit the market."

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