Price Corrections from China Rate Rise Offer Strategic Buying Opportunities

SHANGHAI, Dec. 27 (SMM) - On December 25th, the People's Bank of China (PBOC) raised interest rates, the second rate increase this year. On December 24th, Russia’s central bank announced to lift the overnight deposit rate by 25 basis points to 2.75%, to combat the inflation. By now, BRIC Nations have all increased the interest rate. 

China Monetary Policy Back to Normal
On the evening of December 25th, the PBOC decided to increase the deposit and lending interest rates by 25 basis points from December 26th, sending one-year deposit and lending rate up to 2.75% and 5.81%, respectively. According to China’s National Bureau of Statistics, China’s CPI for November soared to a 28-month high. As 2011 is the first year of the 12th Five-Year Plan period, domestic investment enthusiasm will be high. Coupled with soaring CPI data and well-above-the expected exports, China will face a greater pressure from credit expansion based on the already ample cash flow basis. Hence, China’s interest rate increases indicate its determination in taming inflationary pressure and control on the investment enthusiasm during the first year of the 12th Five-Year Plan period. China has already started to exit from its loosing monetary policy, and the monetary supply will be gradually back to normal.

Interest Rate Hike to Have Limited Impact on Base Metal Prices
Based on observations of market response from China’s interest rate hike in recent years, it can be seen that interest rate hikes are not always unfavorable for base metal prices. According to previous statistics, base metal prices are more likely to rally than to slip some time after interest rate hike. For example, the most actively-traded copper contract price in SHFE market closed at RMB 63,420/mt on October 19th, and slipped sharply by RMB 770/mt the next day after China raised interest rate for the first time this year on October 19th. However, SHFE three-month copper contract price surged to a 40-month high at RMB 70,150/mt after market absorbed the news. Base metal prices were on upward track amid interest rate hike for 8 times beginning in 2006. To sum up, the impact on the base metal market is generally short-lived and limited.

Base Metal Price Corrections Create Opportunities for Strategic Buying
Although China’s central bank raised the interest rate unexpectedly, which adds uncertainties to base metals markets after the New Year’s Day holidays, the major factors affecting base metals prices are still expectations of improving demand from global economic recovery and possibilities that the Federal Reserve will introduce additional monetary policies. Meanwhile, the US and euro-zone members still kept interest rates low, and China’s interest rate rise will cause overseas hot money to flow into China’s stock and futures markets, which will in turn push up base metals prices. Hence, the interest rate increase in China is not necessarily negative for base metals prices. In addition, global economy is still recovering, and global base metals supply and demand conditions will ultimately determine base metals prices in the long term. At present, market players generally believe demand will continue to recover in recent two years. In this context, it will be a good opportunity for nonferrous metal players to make strategic buying if base metals prices stabilize after short-term corrections.

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