China is showing no signs of slowing down in metal production. At a time when the economy is stabilising, instead of returning to the commodities super-cycle, the country is busy churning out more and more industrial metals. A recent Bloomberg report suggests, ‘the gains in aluminium production this year may be more akin to a high-wire act that is only delaying another crash in prices.’ Aluminium smelters in China increased output to their highest in the past one year. The sector is basically responding to improved margins as pricing scenario improved in China before the current dip, the report noted.
The risk for markets is palpable though since demand is receding because of the nascent weakness in the property sector. Moreover, the possibility of a policy shift has made the consumers all the more risk-averse. So, it is very likely that with the changes in the market dynamics the Chinese producers who account for half or more of world’s aluminum output will face renewed pressure down the line.
“The biggest headwind is the property market cooling down,” said analyst Helen Lau of Argonaut Securities Asia Ltd. “China has already announced tightening measures for the property sector and we don’t yet know how that will affect investment. It doesn’t mean demand will disappear but it will get weaker and there is the risk of oversupply again.”
So, which are the underlying indicators flagging difficulties?
Even though China’s economy has logged a modest growth of 6.7 percent in the third quarter of the current financial year, the property sector remains a key concern area. Growth in new floor space under construction fell to 6.8 per cent from a year earlier for the first nine months, versus a cumulative 12 per cent expansion for the first eight months. Industrial output grew 6.1 per cent year-over-year, down 6.4 percent of a median forecast. Building and construction being a major consuming sector of industrial metals, especially aluminium, the demand for the light metal will shrink in the medium term.
{googleAdsense}
According to the Bloomberg report, China has introduced curbs on the property market in 21 cities to pop a property bubble that pushed up the value of new home sales by 61 per cent in September. That is expected to feed into the receding demand of aluminium and other metals used extensively in construction, in the coming year. “There is the danger that by the end of this year, we will have to see either a sharp fall in prices or a sharp fall in production again,” Tomas Gutierrez, a Shanghai-based analyst at Kallanish Commodities Ltd, observed.
This news is also available on our App 'AlCircle News' Android | iOS