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Metal Rally May Cool as China Restrains Lending, Analysts Say
Jan 13,2010 16:30CST
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Jan. 13 (Bloomberg) -- China's measures to rein in lending may curb price gains in copper and aluminum on concern the move foreshadows higher interest rates that will limit demand in the world's largest metals consumer, four analysts said.

"The government's decision to pull back liquidity will damp commodities across the board," said Fei Zhonghai, general manager at CGOG Futures Co., a unit of Cofco Ltd., by phone from Beijing today. China's move may extend a decline in copper, said Chen Yonglin, an analyst at CITIC Newedge Futures Co.

The People's Bank of China yesterday raised the proportion of deposits that banks must set aside as reserves by 50 basis points starting Jan. 18. Economists hadn't anticipated the move until at least April, according to the median of 11 forecasts in a Bloomberg News survey. Policy makers may follow by raising their benchmark rate in coming months, rather than waiting until the second half as most economists in the survey projected.

"The bull trend in the past year was based on two things: an expectation of an improving macro economy, and ample liquidity for some time," CGOG Futures' Fei said.

Copper jumped 140 percent last year and aluminum soared 45 percent as China's $586 billion stimulus spending and record lending spurred imports. The London Metal Exchange index of six industrial metals from copper to tin climbed 98 percent.

China's increase in the reserve ratio "may deepen a downward correction in copper, to below $7,000 in the first quarter," said Chen from CITIC Newedge Futures from Shanghai. The reserve-ratio move will almost certainly hurt investment demand, Chen said. Copper for three-month delivery traded at $7,338 a metric ton at 3:39 p.m. Singapore time today.

Inflation Concern

Inflation risks are rising in China as the economy picks up speed. Exports advanced for the first time in 14 months in December, trade data showed Jan. 10. A government report this month is forecast to show gross domestic product increased 10.5 percent in the fourth quarter from a year ago, the most since the three months to March 2008, a Bloomberg News survey shows.

Economic growth may sustain demand for metals in China, the world's third-largest economy. China increased imports of copper and its products by 63 percent last year to 4.29 million tons and boosted inbound shipments of aluminum and its products by 164 percent to 2.32 million tons, according to customs figures.

"The gains in metal prices that started last year were liquidity-driven and won't stop if loose monetary policies around the world continue," analysts led by Tan Wentao at HNA Topwin Futures Co. said in an e-mailed note today. The reserve ratio move appears to signal a change which will prelude a "real correction" in metal prices, they said.

‘Not Expected'

The decision indicates increasing concern in Premier Wen Jiabao's government that a continuation of the record 9.21 trillion yuan of loans in the first 11 months of 2009 will create a bubble in property and stock prices.

"The sudden increase of the reserve ratio was not expected as the market originally thought there would be ample liquidity in the first quarter," Wang Cheng, Beijing research manager at Wanda Futures Co., said by phone today. "Now that the government has signaled its willingness to take away the excess, commodities will be hit, especially those whose fundamentals look relatively weak."

Copper for three-month delivery was down 1.6 percent today, extending a 1.5 percent decline yesterday. Aluminum fell 1.3 percent to $2,252 a ton, after losing 2.1 percent yesterday.

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