China Seeks to Support Metals Prices… With a Really Bad Idea

Rumors abounded late last week about a really bad idea that the China Nonferrous Metals Industry Association suggested the state is planning.

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The, as yet officially unsubstantiated, suggestion is the State Reserves Bureau would buy 900,000 metric tons of aluminum, 30,000 mt of refined nickel, 40 mt of indium, and 400,000 mt of zinc, although there seems to be some uncertainty about whether zinc will or will not be included in the support program.

And make no mistake that is all this exercise is, a support mechanism, principally for state metals producers hit hard by falling prices and excess supply. Some feel it is akin to Beijing’s poorly thought-through intervention in the stock market last summer when they stepped in to buy shares to prop up the stock market, but although the sums involved would come to an eye-watering $1.5 billion it would be a drop in the ocean of excess supply to the Chinese market.

Back in 2009 the SRB stepped in to the market and purchased some 700,000 mt of copper, a move that contributed to an eventual rise in price from $3,000 per mt to a peak of $12,000 per mt. This time, the suggestion seems to be that the SRB will buy only from state metals producers and to pay prices based on state-owned smelters’ cash production costs rather than a market price.

Needless to say, prices on the Shanghai Futures Exchange have surged, up 5% this week in response, although how long this will last remains to be seen. Like a sugar rush, the effect quickly passes and if production continues to run in excess of demand prices will quickly fall again.

In 2009 a massive stimulus program drove double-digit rates of demand growth, that isn’t going to happen this time around.

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Fortunately, some parts of the industry are taking more sensible action with announcements by some 30 producers that they will cut capacity next year, particularly in copper, zinc, nickel and nickel pig iron, according to Reuters. Moves that will, in the long run, have wider benefits than just supporting prices by reducing the incentive for wasteful investment, less pollution and lower energy consumption.