China-driven nonferrous metals price rally is nearing its end

Metals prices, which have risen sharply in recent months on hopes for a global second-half economic turnaround, now are poised for a steep decline. Reasons: A grim economic forecast from the World Bank, a slowdown in China's demand growth for industrial metals and surpluses numerous nonferrous metals.

The World Bank now says the global economy will shrink 2.9% this year. That is worse than the body's previous forecast for a 1.7% contraction. And it has triggered a revised outlook from Wang Lixin, president of China Minmetals Non-ferrous Metals Co., who says it will be one to two years before the country sees renewed double-digit demand growth for metals. "We think the market will be flat in the next one to two years," Wang tells reporters, dampening speculation that China was already leading a global recovery in the sector.

Increasing metals prices through June¡ªwith copper prices up 54% since January and nickel up 26%¡ªhad led to some analysts predicting demand, particularly from China, was rebounding. But senior executives inside China¡ªand now, ones from global mining giants BHP Billiton and Rio Tinto¡ªsay the price surges probably were linked to stockpiling of metals in China rather than higher consumption.

A combination of high inventory levels and excess capacity will restrain nonferrous metals price increases in the near term, suggests IHS Global Insight's chief economist Nariman Behravesh. In comments at conferences in late June, he says "metals commodity markets had gotten ahead of themselves in the last few weeks, with the fundamentals still not justifying the earlier price rises."

China has been buying up copper and a host of other key raw materials even while the financial slump has slashed demand for the exports responsible for the Asian giant's once ravenous appetite. Chinese raw materials buyers have tapped a surge in bank loans to capitalize on low commodity prices and low shipping fees, analyst Yang Yijun at Wellxin Consulting based in the southwestern city of Chengdu tells the AFP news service. However, he agrees the buying is likely to slow. "China has been stockpiling commodities since the fourth quarter when prices became really cheap," says Yang. "But, large scale buying is gradually coming to an end (as) China's reserves are almost at full capacity."

Macquarie Bank's Beijing-based analysts say in a research note that the stockpiling has been done by China's State Reserve Bureau, which has been widely known, but also by producers, distributors and other speculators hoping to profit from an anticipated second-half rise in prices once the world economy started to recover. Stockpiling is fraught with risk, especially when borrowed money is used to buy goods when there is no demand, independent Shanghai-based economist Andy Xie tells AFP.

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