"We probably have seen the peak of commodity market prices," says David Thurtell, a commodities strategist at Commonwealth Bank of Australia in Sydney.

Metal commodity prices have reversed a decade-long downward trend, due to insufficient global supply, renewed global growth and the surge in demand from China, the world's fastest-growing economy. However, China's economic growth has been too hot at 9.1% last year and 9.7% in the first quarter of 2004. So, Premier Wen Jiabao and government bankers have imposed draconian credit rules and other "forceful measures" to slow manufacturing and construction, and curb GDP growth to 8%.

Beijing's efforts to cool the sizzling economy have reduced Chinese demand and prices for steel, copper, aluminum, nickel and other commodity metals. It also has whipsawed global commodity markets and depressed short-term world prices for most metals. Atop that, veteran metals market watchers have gone into a dither about potential long-term effect on global pricing.

After all, it was booming demand from China in the past year that had been the driving force behind the spike in commodity prices. Also, China suddenly has either overtaken or is approaching the United States as the world's biggest consumer of such materials as scrap metals, steel, alumina, aluminum, copper, iron ore, metallurgical coal, coke and iron ore.

China's voracious hunger for raw materials has created huge supply deficits—and explosive pricing—throughout the world. Chinese central bank authorities instructed national and local banks to curb lending as part of a string of measures to calm soaring investments in plants and equipment. Then, China's Cabinet specifically ordered a stop to new steel, aluminum and cement projects this year. The council also called for a review of ongoing investment projects that require metals and other building materials, such as commercial offices and shopping malls.

Adam Beamond at N.M. Rothschild & Sons Ltd. in Sydney, Australia, believes that "since China was a pillar of high base metal prices, the introduction of credit controls has unnerved the world metals markets.'' Kevin Crisp at Koch Metals Trading in London suggests that, "in many of the commodity markets, China has been a black hole absorbing huge quantities of commodities, but that's clearly not going to carry on forever."

Actually, it's no surprise that commodity metals markets and prices are shuddering at the thought of a Chinese slowdown. China has been importing massive amounts of key commodities to feed the growth of its manufacturing and to improve its infrastructure. In 2003, China accounted for 27% of the steel used in the world, 25% of the copper, 19% of the aluminum and 20% of the nickel. It also accounted for 7% of global oil consumption, 31% of the coal and 40% of the cement.

So, is the Chinese slowdown going to ripple out worldwide? The analysts are divided. "The coming slowdown in the Chinese economy should be viewed as a global event," says Morgan Stanley's chief economist, Stephen Roach, in New York. "There is good reason to believe that the impacts of a sharp slowdown in the Chinese investment cycle could spread well beyond Asia." It's difficult to assess just yet what's likely to happen in China, "but certainly the fears are there that the booming economy, and hence demand for base metals, could well slow over the coming months," says analyst Robin Bhar at Standard Bank in London. "Any slowing in the country's voracious appetite for metals and other important goods could have an adverse impact on world supply/demand and prices.''

However, Robert Friedland, chairman of Ivanhoe Mines in Toronto, which has copper properties in Mongolia, believes "there are very large sectors of the overall economy, such as consumer goods, that are not overheated at all, and will continue to need metals and other raw materials." Frank Holmes, chairman of fund manager U.S. Global Investors, agrees that China's recent rapid growth "largely was driven by large-scale industrial production, but there are other factors involved in China's overall economic growth." China's boom in output of motor vehicles and electronics, for example, has fueled huge demand for copper wiring, tubing and circuit-board components. That, in turn, pushed the base metal's global price to an eight-year high in March. Jack Jones at CIBC World Markets in Toronto adds: "There clearly is potential for a structural as well as a cyclical upswing for commodities."

A market basket of ferrous and nonferrous metals tracked by PurchasingData.com rose in price by an average 39% between January 2003 and April 2004. However, the group's price slipped by 3% in April from March, and mid-May prices had continued to slide. So, the question becomes: "Is the two-year bull market in global metal commodity prices coming to an end?" Probably not, but "pricing is going to be volatile," says Holmes of U.S. Global Investors. The commodity boom is losing steam, but this doesn't mean that demand for raw materials is collapsing—or that metals prices are set to tumble soon. Reason: World stocks of copper, aluminum and nickel have continued to decline. "The aluminum and copper markets still are in the middle stage of recovery," says analyst Michael Gambardella at J.P. Morgan Securities in New York. "But," he states, "there's a new dynamic in North America of a significant improvement in demand patterns and mill product market prices."

Copper's world price dropped 11% in April, its first monthly fall since August, on concern that demand in China might slow steeply, and that U.S. interest rates would rise and the dollar would strengthen—making metals more expensive for holders of other currencies. However, the consensus of analysts surveyed by the Bloomberg News Service see world copper cathode averaging $1.34/lb in the second quarter, up from an average $1.24 in the first quarter. That's 80% higher than a year ago. Copper stored in London Metal Exchange-monitored warehouses fell to 151,200 metric tons in early May, a level last seen in July 1997. So, "while fears of a China slowdown will continue to hang over the markets," says analyst Jim Lennon at Macquarie Bank in London, "supply-demand balances will continue to be supportive of high coppermetals prices.''

Construction, capital spending and communications led a 10% to 15% rise in U.S. copper demand in the first quarter. "Demand for our products alone increased at least 10% over the course of the first quarter, maybe more,'' says Joseph Rupp, chief executive of brass mill giant Olin Corp., "and metal shipments this quarter will grow even higher." So, even if some other regions are sluggish and overall world copper use rises 5.5% this year to 12.3 million tons, sales will outpace production by 600,000 to 850,000 tons, forecast Stephen Briggs, an analyst at Societe Generale in London. "There is very limited supply coming on stream,'' agrees analyst Ingrid Sternby at Barclays Capital in London. "Even if the second quarter represents the pricing peak, we will still see high average prices for this year.''

Meanwhile, first quarter aluminum product orders ran 21% higher than during the first quarter of 2003. "The robust pace of U.S. aluminum mill orders reflects the strong growth apparent in the U.S. economy," says J.P. Morgan's Gambardella. "The strength demonstrated recently by the U.S. economy coupled with relatively strong global demand should continue to underpin sales and margin expansions for the aluminum companies."

World-wide number two producer Alcan now expects world demand for primary aluminum to grow by 8% this year, an upward revision from its growth forecast of 7.6% made in February. "Sales are getting better faster than we thought," says Travis Engen, chief executive officer of the Montreal-based company. Alcan expects supply to rise only 5.8% this year, compared with an earlier forecast of 6.2%. That would lead to a deficit in the aluminum markets, the first in three years, of 430,000 metric tons. Engen plays down media speculation about collapsed rates of growth in China because of Beijing's worries over an overheating economy. "I think it's not going to happen," Engen says. "China is a really robust market." Also, demand in the U.S. finally is advancing enough that domestic primary ingot pricing may take on its own personality. The consensus still suggests ingot to average 80¢/lb again in the second quarter, but some analyst voices now suggest a local demand push could raise the average to 85¢/lb.

World nickel demand of 1.3 million metric tons won't be matched by production of 1.28 million metric tons, so there will be a price-boosting deficit of 20,000 metric tons, according to the International Nickel Study Group. Still, nickel has lost 8% of its pricing value by April from its peak of almost $7/lb in February—when China was over-buying key raw materials for stainless steel no matter what the cost. Nickel cost an average $6.77/lb in the U.S. in the first quarter of 2003, up from $5.74 in the fourth quarter and compared with $3.81 in the year-ago first quarter. The market mavens are predicting a second quarter average at $6.44. Reason: The China buying binge is over for now, and many other users of nickel metal have stepped up the search for cheaper substitutes as prices have risen. In fact, the International Nickel Study Group says Asian producers especially are leading the charge to make lower nickel-content stainless steel.

But there are other forces at work that could weaken nonferrous metals pricing, even if Chinese growth resumes later in the year. Most commodity booms last for about 30 months, according to a Merrill Lynch analysis in New York, and are triggered when demand unexpectedly increases, catching suppliers off guard. After a while, attractive prices convince producers it is worth their money to expand capacity. Now, BMO Nesbitt Burns in Toronto says $5.2 billion was raised for exploration and mine development last year, more than double the amount in 2002, and another $2.6 billion has been raised already this year.

Also, many mining companies are ramping up production, which will generate new supply that takes some pressure off prices. And since it often takes years to bring new mines into full operation, expansions that occur at cyclical peaks often can lead to flat or weaker prices for years to come. It also is possible there will be added downward pressure on commodity prices as hedge funds and other speculative investors — some of whom wandered into the commodity market over the last year — lose interest.

Steel demand and prices have been so strong in China that they have caused a world shortage of raw materials-from ore to scrap-and caused mill product prices to spike to levels not seen since the Energy Crisis of the early 1970s. Beijing has signaled that it would like to see less investment in several resource-dependent industries. The government has slowed construction by imposing new rules that companies building steel, copper, aluminum and other resource-dependent commodity projects must have cash for 60% to 100% of the total investment.

In the U.S., salestags for steel now have skyrocketed past any heights previously entered in records dating back to 1950. Based on a market basket of 10 carbon steel mill products tracked by Purchasingdata.com, prices in April were 60% overall higher than December and 71% higher than the same month last year.

David Thurtell, a commodities strategist at Commonwealth Bank of Australia in Sydney, predicts world steel prices will remain at relatively high levels over the next several quarters. Although the steel mills in the U.S. are trying to raise steel transaction prices through summer, the pressure is off raw materials and Thurtell believes world prices aren't likely to climb and could even fall slightly in the third quarter. Key factor: Automotive is the world's largest steel-consuming sector. While the market in China is skyrocketing, demand elsewhere is slumping because of rising gasoline prices.

Merrill Lynch & Co. analyst Daniel A. Roling in New York disagrees, and looks for "higher steel price realizations" in the second quarter. He says: "American steel demand is strong as inventories remain low, which will allow the mills to raise base prices even as raw material surcharges decrease. The nation's steel producers aren't booking orders too far in advance or accepting lower-than-market prices to pre-empt a potentially sizeable increase in summertime imports." Truth is that imports have been selling at (or above) market prices. "This indicates strong demand," Roling says, noting that import levels are still low compared with peak levels reached in 1999.