China Metal Futures Sink In 2011 But Copper May Lead Revival

Dec 29, 2011 BEIJING (Dow Jones)--Metal and rubber futures broke a two-year rally to fall sharply this year amid global growth jitters and domestic credit tightening, but strong demand-supply fundamentals underpin some metal prices though demand outlook uncertainties will persist next year.

Industrial commodities had been among the biggest beneficiaries of China's post-crisis economic stimulus, which took copper futures up 66% and rubber up 69% in the last two years.

That stimulus support dried up this year as Beijing moved to tighten credit conditions amid rising inflation and signs of a property bubble.

In tandem, copper futures on the Shanghai Futures Exchange fell 25%. Rubber was down 35%, while steel futures lost 12.5%.

Still, China continues to grow while copper supply has hit problems in Chile and Indonesia in recent months, suggesting continued support for prices.

China's November trade data, the latest available from customs, depicted robust commodity demand, running counter to other data pointing to an economic slowdown, Barclays Capital said. "Local inventories of commodities are low," it said. "There has been aggressive de-stocking of copper and aluminum all along the consumption chain through most of 2011, which has only recently come to an end."

Restocking could provide additional strength to import demand early in 2012, Barclays said.

Imports of metal concentrates, which are raw materials for industrial metals, rose across the board in November, with copper imports rising to their second-highest monthly volume on record.

The data suggests that reports of copper and other commodity imports being used to illegally finance real estate projects--with no real end-user demand--may have been exaggerated. The central bank had moved to clean up such practices in August, but copper imports continued to rise in following months.

"China is short of copper," said Yang Yinghuai, metals manager at Cofco Futures Ltd. "In the next three to five years, this situation cannot be changed."

Iron ore import prices also sank this year, losing 21% this year and posting the sharpest one-week decline on record in October, as Chinese steel makers halted shipments amid shrinking real estate demand.

Ore prices have since shown some sign of stabilizing around $140-$145 a metric ton, though the outlook still remains uncertain.

"China's steel mills could still restock iron ore in the coming months, but we expect any such activity to be cautious, as no one wants to rush into the market amid economic uncertainty," Standard Chartered analyst Judy Zhu said.