Metals 'to Suffer' as China Ends Stockpiling Drive, Blanch Says

NEW YORK, June 25  -- Metals prices may decline in the next three months as China, the world's biggest user, begins to run down inventories that were built up earlier this year, according to Francisco Blanch at Merrill Lynch & Co.

    "China has been accumulating inventories of commodities for the last six months or so," Blanch, head of global commodity research at Merrill, said today in an interview. "This accumulation of inventories now needs to be cleared off. End-user demand in China has not really picked up."

    Metals prices surged as much as 48 percent this year to a June 11 peak on restocking by Chinese companies and speculation that the nation's State Reserve Bureau was also buying metals to build up stockpiles. China's copper imports in May rose to a record, according to Guantong Futures Brokerage Co.

    "Inventories in relation to demand will probably prove, in my opinion, to be a bit overdone in the short run, which is why we expect commodity prices to come off," Blanch told Bloomberg Television. "Oil and the metals markets will start to suffer because of large inventory accumulation."

    Jim Lennon, senior commodities strategist at Macquarie Bank Ltd., said last month that China, including the State Reserve Bureau, was "taking virtually all of the copper out of the system" and that the pace of the nation's demand may slow. Copper prices may drop "on falling Chinese buying interest," according to a May 8 report from Societe Generale SA.

    Import Forecast

    Pan Pacific Copper Co., Japan's biggest smelter of the metal, forecast on June 19 that China's copper imports may plunge to 300,000 tons in the three months to Sept. 30. Imports were 748,281 tons in the first quarter and totaled 655,177 tons in April and May, according to customs data.

    Copper futures on the London Metal Exchange have surged about 58 percent this year, and traded today at $4,863 a metric ton. Blanch didn't give a precise forecast for the metal, which is used to make pipes and wires.

    Stockpiles of copper monitored by the Shanghai Futures Exchange rose last week to the highest in 21 months, totaling 68,536 tons, nearly quadruple the level at the start of the year. The exchange's tally does not include material held by the State Reserve Bureau.

    The stockpiling comes amid complaints lodged with the World Trade Organization by the European Union and the U.S. about Chinese export restrictions on magnesium, coke and zinc. China is unfairly using export taxes to keep materials costs lower for domestic steel and manufacturing companies, hurting overseas competitors, according to the U.S. and the EU.

    'Further Downturn'

    "The story in China in this particular case could obviously result in restrictions in other parts of the trading world," Blanch said. An increase in protectionism may be "a key driver of a further downturn in trading, which could be quite negative," he said.

    Crude oil fell to less than $69 a barrel in New York after- hours electronic trading today after an industry report showed an increase in U.S. gasoline inventories, raising concern the global recession will sap fuel demand.

    "Oil will head toward the low $60s by the end of the year," Blanch said. "I just think we've run way too far. $70 a barrel is a mid-cycle price. There is more downside risk than upside in the next three months."

    (Source: Bloomberg)