China backstops commodities pricing

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Jun 2010

CHINA'S appetite for raw materials has again powered a strong commodity price recovery over the past financial year. This continues to offset the slump in Western economies. Strong price gains across base metals and bulk materials were recorded for the 2009-10 fiscal year, with a 40 per cent jump in base metals prices, a 26 per cent gain in oil markets and an 82 per cent gain in the iron ore industry.
"There has been a varying degree of performance, with everything a lot stronger," ANZ commodities research head Mark Pervan said.
"A lot of that has been driven by the sharp recovery in Chinese demand, which has been a better than expected performance because of the ability of China to roll out stimulus demand quickly and in a commodity-intensive way."
Iron ore was most heavily influenced by China, with 60 per cent of global seaborne trade last year landing in the economic powerhouse.
China also consumed one third of the base metals and one 10th of the world's oil.
The push by major iron ore and coal producers for quarterly pricing killed the annual benchmark system and had the biggest impact on bulk commodities.
"The transition from annual contracts to shorter-term pricing is a major change," Citi commodity research global head Alan Heap said.
"For iron ore and coking coal there is quarterly pricing but I think that is an interim step and we are heading towards monthly, and then a full-blown spot market."
Prices have come off in copper markets but are still well above the marginal cost of production.
"On the speculative side, for copper, although there has been profit-taking by speculators, they have not actually been aggressively shorting the market," Mr Heap said.
Goldman Sachs JBWere analyst Malcolm Southwood said copper had real supply constraints and China did not have its own "swing capacity" in copper, as it did with other base metals, providing further support to the price.
Supplies of aluminium, nickel and zinc are expected to remain in surplus this year, with more production than consumption.
But the copper market is tipped to move back into deficit in the next year.
"You have a relatively easy supply response available in zinc, nickel and aluminium -- you don't have in copper," Mr Southwood said.
The strong gains in commodities over the past year came from a low base after commodity markets experienced heavy selldowns in the later part of 2008.
Mr Pervan said the gains had been a two-way story this year. Prices peaked around April, but then came a healthy correction driven by the re-emergence of financial instability, particularly in Greece.
The price correction caused a drop of about 10-30 per cent in commodity markets, he said.
Goldman's Mr Southwood said the key driver for commodities this year had been quick recovery of demand in China.
"That has gone a long way towards offsetting the much slower recovery in demand for raw materials elsewhere," he said.
"The reality is that as far as the OECD countries are concerned, we are still 15-20 percentage points below the level of demand that we were seeing before the global financial crisis.
"The ability of the Chinese government to throw money at the problem" through a stimulus package that has been very raw-materials-intensive "has been instrumental".
The main issues commodities markets are agonising over are sovereign risk in Europe and the impact of a property-driven slowdown in China.
Gold is benefiting from economic uncertainty, with prices expected to keep rising.
Analysts said a high level of uncertainty was likely, with the market more cautious, and that meant the precious metal could reach record highs near $US1300 an ounce.
Overall, lesser price gains than the previous year are expected in the next financial year, but there could still be surprises, with some volatility.
"The easy gains have been had in the commodity markets," Mr Pervan said. "Strong Chinese demand will offset what is likely to be a disappointing Western world recovery.
Recovery in the US would be "soggy", he said.

Source: The Australian