Buyers complain that demand in China is causing supply tightness and steep price inflation in the North American markets for metal scrap, iron ore, rare earths, copper, iron ore, nickel, metal castings and such alloys as ferrosilicon. "China continues to draw down available raw materials inventory from the U.S.," grumbles a purchasing manager answering Purchasing's latest business survey. "Exports of scrap and other materials are creating the pseudo-shortage in which suppliers are expecting price increases on what's left for domestic customers."

In the case of raw materials, perception indeed is reality as projected Chinese consumption growth of key metals is expected at 24% this year. And, while world price inflation for metals may not attain the double-digit rates of 2007, the outlook for ferrous, nonferrous and precious metals is that they will remain elevated, analysts forecast.

Upshot for buyers: What happens to manufacturing materials' pricing in the U.S. market often now reflects Chinese supply, demand and price benchmarks. The extraordinary rate of global demand growth and pricing for copper in 2006–2007 was triggered by 15–20% annual growth in Chinese demand, so it came about despite somewhat weaker purchasing in the next two largest consuming regions, North America and Europe.



Olympic stadium, the Beijing National Stadium, under construction for March completion.

Last year, China alone used almost 4.6 million metric tons of copper, or about 23% of the world's supply. That's up from 10% a decade ago, according to CRU Analysis, a London-based metals consultant. Analysts suggest that the latest supercycle in copper, which has seen prices increase by 300% since 2003, has been caused by that surge in Chinese buying. Last year's net imports of the red metal increased by 8% to more than 1.1 million metric tons, according to state-owned research group Beijing Antaike Information Development. This pulled more of the metal away from the other copper-using markets in 2007 and boosted the global price for primary cathode by 6% to a record-setting $3.25/lb annual average.

The China Nonferrous Metals Association points out that China's need for mined and processed copper concentrates last year was in excess of 4,000 metric tons, while internal production was less than 3,270 metric tons, requiring imports of 730 metric tons. The nation also was a net importer of red metal scrap. And, as the world's largest steel producer, China is the largest consumer of iron ore, but it imported hundreds of thousands of metric tons last year since it used much more than the 400 million metric tons it produced.

In interviews and e-mails, the principal analyst at Bradford Research/Soleil Securities in New York agrees that China now is the unquestioned driver of the global base metals marketplace, displacing the world's second-largest consumer, the U.S. "In an economy already the size of China's, the sheer scale of the infrastructure building, and growth of consumption of the core building blocks of a modern economy are adding much of the marginal demand to world commodity consumption," Charles Bradford says.

A review of U.S. Geological Survey data of global metals and minerals finds that China ranks higher in use than production for aluminum, bauxite, cobalt, copper, ferroalloys, iron ore, lead, magnesium and zinc. Outdated mining and ore-processing technologies are being replaced with modern techniques, but China's rapid industrialization continues to require imports of minerals from abroad as steel, aluminum and copper metals production rapidly have outstripped domestic iron, bauxite and copper-ore production.

Take aluminum as an example: China is producing more aluminum than ever. The country produced 12.5 million metric tons of aluminum in 2007 which required 62.5 million metric tons of mined bauxite ore. Just five years earlier, China smelted 5.5 million metric tons of aluminum ingot from 27.5 million metric tons of bauxite. So, the country now uses 35 million metric tons more of the ore—which no longer is available to world markets for other producers to purchase.

The SARS (Severe Acute Respiratory Syndrome) epidemic of 2002–2003 dealt a blow to Asian economies, crippling travel, trade and local currencies. Since then, Chinese economic growth has been sizzling and the country's industrial economy has shown no signs of slowing down. China's gross domestic product (GDP) is projected to reach the equivalent of $3.88 trillion in 2008, up 10.2% from last year, according to a report by the country's major think tank, the Chinese Academy of Sciences. As reported by Beijing-based news services, the CAS predicts that China's economy will slip a little from 11.5% growth in 2007 because of systematic problems in obtaining and paying for what they call "resource commodities" available only from global sources.

China's trade surplus surged 47.7% over a year earlier to reach a record $262.2 billion in 2007, the General Administration of Customs reports. The total foreign trade hit a new high of $2.17 trillion last year, up 23.5% from a year earlier, according to the Customs Administration. The country's trade surplus for 2006 stood at $177.47 billion.

Xinhua news service reports from Beijing and Shanghai suggest that over-investment continues to expand output by China's steel sector, despite measures attempted by the central government to chill the red-hot industry. "Over-investment in the steel industry has not been solved," according to Luo Bingsheng, executive vice-chairman of the China Iron and Steel Association (CISA). He earlier had forecast that China's steel production was expected to hit 480 million metric tons last year; instead, it was closer to 488 million metric tons.

A story on People's Daily Online using data from the National Development and Reform Commission reports that fixed-asset investment in the steel industry amounted to $4.04 billion in this fiscal year's first quarter, up 107% over the same period of last year. CISA reports show that new steelmaking capacity grew by 16 million metric tons last year despite government-ordered shutdowns of 15 million metric tons of outdated furnaces.

So, CISA's statistics show that China produced 11% more steel at 488 million metric tons in 2007. The International Iron and Steel Institute forecasts another 11.5% rate of growth in 2008, accounting for 35% of the world total. The fact that China's annual steel production capacity is well in excess of 500 million metric tons means that the country's demand for iron ore, scrap, coal, coke, limestone, ferroalloys and other raw materials will continue to draw down world supplies for some years to come.

Bauxite being mined by BHP Billiton in Australia is destined for alumina refineries in China.

That may explain why there have been months of largely unsuccessful attempts by several central government economic and financial departments ordered by the National Development and Reform Commission to curb China's rapidly increasing investments in steel, aluminum, copper, cement and other basic materials industries. Xiong Bilin, the National Development and Reform Commission's deputy director for industry, had forecast that steel production capacity would be cut by 36 million metric tons last year.

After missing that goal, the NDRC, the country's top economic planning agency, is working with 18 provinces, autonomous regions and municipalities to eliminate 49.3 million metric tons of outdated iron smelting capacity and 36.1 million metric tons of outdated steel smelting capacity at 573 enterprises. The NDRC also is trying to blunt attempts by steel companies to undertake new expansion projects.

Still, local governments and banks are continuing to finance such activity as the just-begun construction of a 1.8 million metric ton/year cold-rolled steel plate plant in the Guangdong capital city of Guangzhou. The $876 million project is supported by city officials and backed by Guangzhou JFE Steel Plate Co., a joint venture between Guangzhou Steelworks and Japanese steel giant JFE. The project will mainly produce quality steel plates for cars, high-grade electrical appliances and the building industry.

China also has led the world in nonferrous metals output for six years in a row, according to the China Nonferrous Metals Industry Association. But, the nation still had to import copper, aluminum, nickel, lead, zinc and magnesium to meet demand. And even if nonferrous metals production expands in the 2007–2008 timeframe, as expected, pressure will continue to keep prices at a high level due to rising demand, suggests Kang Yi, chairman of the China Nonferrous Metals Industry Association.

Metals market commentator Bradford says the recent attention being paid to manufacturing commodities and their prices contrasts with previous attitudes. "[China's] producers of such raw materials saw little encouragement from poor profit margins or negative long-term return on capital to increase new plant capacity or production," he says, "so, mines were abandoned, smelters and refineries were retired early—or weren't upgraded, or remained unbuilt." And that kept capacity stagnant or sliding.

Since 2002–2003 especially, these trends have sharply reversed, Bradford says, as producers and processors of commodities have struggled to keep pace with resurgent demand. "The accompanying growth in capacity to meet that demand, often requiring long leadtime strategic investments, will take time to surface after such a long period of under-investment, and has some serious catching up to do," he says. So, with more efficient new-technology production and processing capacity needing to be built, "many prices have exploded upwards."

Current or expected medium-term conditions seem unlikely to reverse commodities prices for any number of reasons, starting with crude oil around $100/barrel. As long as policy makers in the U.S. and Europe walk a tightrope between sanctioning interest rate cuts to shore-up heavily indebted consumer-dependent economies, "any puncturing of the commodities' bull case is likely to be delayed," says Bradford. Another factor, he says, is the increasing de-coupling of Asia's growth trends from those of Europe and the U.S., the same factor that has spurred the commodities' supercycle.