Panic in China plays havoc with aluminium price

COMMODITY traders in Asia believe there could be huge distortions across a range of metal prices.

The traders base their views on rumours that the Chinese Government is preparing an unprecedented multibillion-dollar buying spree to build reserves and rescue local smelters from oblivion

As well as introducing short-term twists in metal trading, Beijing may be setting itself up for giant trading losses, dealers say. The warnings by metal dealers come with aluminium prices already in chaos.

It is viewed as one of the metals most heavily exposed to the economic downturn, and many believe further price collapses could be imminent. Despite rumours of behind-the-scenes buying by the Government, the metal fell by its daily trading limit of 4 per cent on the Shanghai exchange on Wednesday, closing at a 15-year low amid fears of a global consumer and construction slowdown.

In China the visible effects of a property price crisis and sweeping factory closures in the most heavily industrialised provinces have shattered market hopes that metal prices will recover soon.

In a move that spooked many investors, analysts at HSBC unveiled huge downward revisions to their aluminium price forecasts, pointing to the surprising rate of slowdown in China and the slow reactions of smelters in lowering production.

The increasingly dire soundings from the car industry, where plunging sales and sharp production cuts have become daily fare, have also worsened the prospects for a revival in aluminium prices much before 2010.

Speculation of state-sponsored reserve building by Beijing intensified on Wednesday after Wen Xiajun, a senior director at China's state-run Nonferrous Metals Industry Association, said the Government was considering "all base metals" as potential buying targets in its bid to stimulate domestic demand and prices.

Mr Wen's comments follow previous suggestions he has made that Beijing would restrict its metal-buying ambitions to aluminium.

The business environment has turned dire for many Chinese smelters. The plunge in aluminium prices -- they are about 50 per cent down from their peak in the northern summer -- has put the metal below the operating cost of about half the companies in the Chinese smelting industry, forcing what analysts at HSBC believe could become a capitulation.

China has already begun to buy soybeans and other foodstuffs to help farmers, and the metal industry has been calling for a similar strategy to be adopted in an effort to prevent smelters going into bankruptcy.

The provincial government in the aluminium smelting heartland of Yunnan in southwestern China said this week it planned to buy as much as a million tonnes of ore and processed metal to try to prop up smelting operations. Commodity traders in Hong Kong said "unusual" price movements over recent days suggested Beijing had already stepped in to metal markets as a buyer.

Wensheng Peng, head of China research at Barclays Capital, said the logic of any attempt by the Chinese authorities to buy up aluminium stocks was hard to fathom. "Yes, some companies have built huge stocks of metal at high cost and are now in big trouble, but then the Government should just give them money rather than playing in markets," he said. He agreed that any discussions of state aluminium purchases were hard evidence of rising panic among Chinese lawmakers.

Unsold inventory of aluminium and other metals has been piling up fast in China, with the surplus expected to rise to more than 1.2 million tonnes next year.

Even greater than that may be the size of the "hidden" surplus in China -- metal supplies that are not declared to the Shanghai exchange but wield a vast material impact on investors' ability to calculate the balance between supply and demand.

China already plays a central role in dictating the prevailing price of aluminium. Seven years ago it accounted for only 15 per cent of global demand, but that has now risen to 34 per cent. By some calculations, 95 per cent of demand growth for aluminium is accounted for by China.

Copyright and Exemption Declaration :¢ÙAll articles, pictures and videos that are marked with "China Aluminum Network" on this website are copyright and belong to China Aluminium Network (www.alu.com.cn). When transshipment, any media, website or individual must list the source from "China Aluminium Network (www.alu.com.cn)". We seek legal actions against anyone that disobey this. ¢ÚArticles that marked as copy from others are for transferring more information to readers, do not represent or endorse their opinions or accuracy and reliability. When other media, website or individuals copy from our website, must keep the source. Anyone that changes the articles' sources will hold the responsibilities for copyright and law problems. We also seek legal actions against anyone that disobey this. ¢ÛIf any articles copied by our website concern the copyright and other problems, please contact us within one week.