The European debt crisis has rather overshadowed the usual preoccupation of metals analysts, commentators and investors â€“ China â€“ of late, so a couple of broadly related articles in Thomson Reuters makes interesting reading.
It is clear metal prices will not escape the effects of the Euro debt crisis, which seems to lurch between relief and panic in equal measure, but every now and then prices touch base with reality long enough to make what is happening in the world’s largest producer and consumer of steel, aluminum and copper important as we try to discern what the year ahead may hold for prices.
A key driver of metals prices in China has been and remains the construction industry, but Reuters helpfully explores what is happening in various sectors of what is actually three or more industries under the construction sector.
Headlines frequently remind us that the Chinese property market is a bubble in the process of bursting; in reality, only the residential, mostly coastal property market is on the slide. Prices have come off for the last three months of 2011 and some believe higher priced coastal or major cities could still see 10-20 percent declines in 2012, which according to Reuters could shave 2 percent off GDP this year.
Falling prices mean a sharp drop in house starts and fewer house moves mean lower sales of white goods and home appliances, hitting steel, copper and aluminum demand. However, while the residential housing market is important, it’s not the whole story when it comes to consumption of steel, aluminum and copper by the construction sector.
Infrastructure continues to grow at a frenetic pace, Reuters reports, and affordable housing will continue to generate demand for steel, but less for copper and aluminum as cheaper properties will tend to use lower-cost materials (plastic pipes instead of copper, for example.) Affordable housing is expected to add 7 million starts this year and 4 million in 2013.
Yet while property construction accounts for 20 percent of copper demand in China, the continually robust power production and transmission industry accounts for 40 percent. High-speed rail is also quietly making a comeback after last year’s disasters hit the headlines and halted some key projects.
In the wider economy, the ramp-up of reserve requirements may shortly be eased as inflation continues to fall, freeing up capital for stock building and investment. One significant data point reported by Frank Holmes, CEO at U.S. Global Investors, in a Mineweb article is the sharp increase in money supply.
Source: Weldon Financial
After China hit a low level of monthly money supply growth, the three-month change in M-2 money supply climbed to record levels during the final month of the year as controls were eased. This is expected to continue through 2012, with ISI Group anticipating a potential reserve requirement cut after Chinese New Year celebrations in February, then possibly again in April, June and August. Also, loans “have become more readily available in recent weeks,” says ISI, evidenced by rising copper imports and inventory levels.
So the consensus appears to be we can expect continued solid growth from China in 2012, albeit at a slower rate than in 2011. Reuters reports Goldman Sachs cut its average forecasts for 2012 copper prices to $8,567/ton down from $9,200, and for aluminum to $2,321/ton from $2,500; both, though, are 5-10 percent higher than current levels. Iron ore prices over the year are expected to reach around $150/ton, a Reuters poll predicted, lower than the $166 average in the first 11 months of 2011, but still higher than the current rate of around $140/ton.
The strain will show most in the steel sector that is facing the largest capacity overhang and poor export prospects. Pressure will be applied by Beijing and CISA for the industry to re-structure and close older capacity, but in true Chinese style, steelmakers will likely close older plants and open more efficient new ones, as is happening with aluminum where higher-cost plants are being idled with new lower-cost plants being opened in western and northern provinces such as Xingjiang, Gansu and Ningxia to take advantage of lower energy costs, Reuters’ Andy Home reports.
As (we optimistically predict) Europe finds solutions to its sovereign and banking crisis in 2012, growth will not bounce back in Europe, but the fear factor will slowly recede and China’s slower yet still solid demand growth will once again take center stage.