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Supply, Not Demand A Short-Term Issue In Chinese Metal Markets

By Chris Shaw

A recent trip to China has given commodity analysts at Barclays Capital better insight into the state of market activity in that country, with their findings suggesting there has been a slowing from the rates experienced in the first half of the year, enough to indicate buying activity in metal markets may be somewhat weaker in the final weeks of 2009.

As Barclays notes, import volumes of metals in the first nine months of 2009 were huge, even as domestic production was also quite strong. This has combined to increase the availability of many metals and given this has come at the same time as consumer destocking has been going on, it has created a view in the market demand has weakened.

This has been reflected by stock increases on both Asian LME warehouses and on the Shanghai Futures Exchange plus lower physical premiums for some metals. But the key according to Barclays is the recent moves are a reflection of strong supply and not of weak demand, as the fiscal policy measures of the past year or so have actually been very good in terms of stimulating demand for metals.

As an example, Barclays points out copper demand has been very strong in the power sector, quite good in the consumer goods sector and is improving in the electronics sector. Construction demand for both zinc and aluminium has also been strong, with aluminium demand in particular being more positive than for other metals.

Looking at stock levels, the sources contacted by Barclays indicated inventories of finished and semi-finished metals were at normal levels, with much of recent inventory accumulation coming in the primary and refined metal forms. Current higher prices are encouraging a running down of such stocks and according to Barclays this could continue into the early part of next year, which it suggests may keep a lid on physical market activity and import demand in the shorter-term.