Copper rally runs into reality
THE recent run in commodity prices is losing momentum amid repeated warnings that China's imports will start to slow.
The copper price, which has been surging, rose again early this week after US Federal Reserve chairman Ben Bernanke said the worst of the US recession was over.
Along with most commodities, copper lost some of its gains late in the week, on worries that Chinese imports could slow as speculative buying comes to an end and supplies pile up in London Metals Exchange (LME) warehouses.
A Merrill Lynch report says Chinese demand remains critical to the commodity outlook, and policy changes over the next six months could have significant consequences.
Strategist Tim Rocks said Chinese data for August confirmed that the recovery in China was not yet broadening and that commodity speculation was easing.
He said the implications for the Australian market were that even though Chinese growth would stay strong, this might not help commodity companies.
"China has overbought on commodities this year due to speculation linked to easy credit," Mr Rocks said.
"As this speculation ends due to falling commodity prices or government action, imports will drop.
"Our concern is that this overbuying must result in both reduced demand and lower spot prices over the next few months. China will probably time this weakness so that it will have the largest impact on contract negotiations in 2010."
Merrill's China team expects more aggressive Chinese tightening will start from March next year.
"Chinese growth will become less commodity-intense next year. As soon as consumption and exports have recovered, China will target a slowdown in apartment building. This will mean some lessening in steel and iron demand," the report said.
On the LME, aluminium rose to a four-week high, buoyed by signs of improving demand, while nickel, zinc and tin edged higher and lead finished slightly down.
Copper prices have more than doubled so far this year amid speculative buying, signs of improvement in the global economy and Chinese restocking, but that process is coming to an end and real demand will soon surface.
National Australia Bank commodities analyst Ben Westmore said there had been incredibly strong imports of most commodities into China for four months.
"If you abstract seasonal patterns it has been very strong compared to last year, and most of that has been a result of the areas that the Chinese stimulus package has been focused (on)," he said.
"Part of the large imports was firms restocking and at the moment we have got to a point where the restocking process has matured and there are some indications that the effects of the stimulus package are starting to wane."
The run-up in prices has been China-centric and most of the big developed countries that import the commodities are struggling, meaning if imports into China do abate it will have significant short-term implications for some of the markets.
"There will be short-term weakness, retracing some of the gains because China's imports slow, but as industrial production in the rest of the world comes back online later this year you will have prices continuing on to trend upwards," Mr Westmore said.
"It is a short-term stock cycle story rather than anything that will be enduring."