Metals Industry's Health Depends on China

JOHANNESBURG, June 15 -- China's role was now more "pertinent" to the health of the metals industry than at any other time in the last century, with the hope for the metals industries in 2009 resting with the Asian giant, independent research firm AME Mineral Economics said in its latest AME Focus newsletter.

    The researchers note that China's industrial production (IP) growth rate was 7,3% in April, with IP generally representing about 32% of global economic activity.

    Should China's IP reduce by 50%, it would pull down the global IP growth by about 0,5% a year, based on a market exchange rate basis.

    On a purchasing power parity basis, a 50% drop in Chinese IP would result in an additional 0,8% reduction in global IP. This would reduce the forecast global IP of -2,8% for 2009 to -3,6%, the report highlighted.

    Subsequently, the demand for metals would decline by about 28%, said the AME.

    China accounted for about 35% of global metal demand and produced about 45% of steel by physical production in 2009, the report noted.

    Even if Chinese IP were to drop by 20%, the metal demand would revert to that seen in the first quarter of 2009, when the prices were close to the average cash cost of production, the AME stated.

    The AME was still expecting China's gross domestic product to grow by 6% in 2009 and would continue to keep an eye on economic data from the Asian country.

    BASE-METALS OUTLOOK

    Meanwhile, the researchers expected global demand for copper to fall by 10,4% in 2009, as the Chinese buying of copper starts to slow down and demand from Western markets was expected to remain subdued until 2010.

    The copper currently being bought by China was used for infrastructural projects, which would be completed or was being stockpiled for future use.

    Further, the AME said that it believed that the market fundamentals did not justify the growth rate in nickel cash prices observed throughout May. It said that the rally on the London Metal Exchange (LME), where nickel broke the $6/lb ceiling two days in a row had not been supported by demand and was not sustainable.

    Nickel demand in China would drop by 9,2% in 2009, while Japan would see a 27% drop in demand and the US a 16% decline in demand, noted the researchers.

    Meanwhile, while lead and zinc prices have seen some recovery in May, the AME warned that any exuberance over further rises should be tempered.

    It explained that a number of factors have, and would continue to, moderate zinc's potential for price increase into 2010, one of which was that there was no clear signs of sustainable demand within China or from the Western markets.

    However, stimulus packages would begin to create some genuine demand for zinc later in 2009 and in 2010, as new zinc-intensive infrastructure projects were started, it added.

    Further, the AME noted that while the LME zinc price, which was at about 60 c/lb to 65 c/lb, was unsustainable for an extended period of time, but that China's contradictory directives affected the market balance in the rest of the world.

    Growing stockpiles and slow capacity curtailments were challenges that had to be overcome.

    Greenfield and brownfield aluminium projects in China, which were due to come on stream in the next three years, had been blocked, phasing out about 800 000 t/y of outdated capacity and increasing consolidation in the base-metals industry, said the researchers.

    However, there was additional capacity that would come on stream in 2009, which could potentially replace the phased-out capacity and reduce the benefits of capacity curtailments, the AME added.

    COAL

    Metallurgical coal imports by China of 2,8-million tons in April were a fivefold increase on the year before.

    The Asian country had also increased its thermal coal demand by 27% to 16,7-million tons in the first four months of 2009, while exports were down 33% to 9,2-million tons.

    Meanwhile, the researchers noted that China's crude steel production in March and April reached the highest two-month output figure since June and July last year, despite the global economic slowdown.

    Fixed-asset investment in the first quarter of the year had also increased by 29% year-on-year, while the number of vehicles produced, and cement production, had also increased.

    (Source: miningweekly.com)