China won’t slow base metals demand

By Tom Stundza -- Purchasing, 4/25/2007 7:43:00 AM

Strong first quarter growth of 11.1% in China has fueled speculation the government may impose measures to slow the economy. But, if that doesn’t happen, the country’s appetite for base metals consumption will remain strong, say analysts and traders who reckon that buyers across the globe will continue to face high prices and tight supplies.

China’s urban fixed asset investment increased 25.3% in the first quarter but analysts suggest any macroeconomic tightening measures will be mild, at best. Raising interest rates or deposit rates too much would have the unintended effect of increasing the attractiveness of renminbi-assets, and draw more liquidity into China, according to a report on the NYMEX-Direct newsletter.

“It’s not going to lead to a withdrawal of a lot of liquidity, there’s too much hot money,” says Beijing-based analyst Bonnie Liu at Macquarie Research. Liu doesn’t expect a sharp increase in lending rates either, because this would reduce imports while failing to slow exports. “Because the trade surplus is an important source of foreign exchange reserves, China’s liquidity problems would get worse.”

China is the world’s largest consumer of copper, aluminum and zinc, as well other metals. Macquarie Research is forecasting a growth of 10% in China’s copper consumption in 2007, 30% in aluminum, 10% in zinc and 15% in lead, as fixed asset investment accelerates ahead of the 2008 Olympics.

Moreover, because the government usually adopts a gradual approach in any macroeconomic adjustments, consumption of base metals will continue to be driven more by price factors rather than government policies, says a commodity analyst at one of China’s largest copper traders.