Price wobble clouds short-term outlook for commodities

PUBLISHED : Monday, 29 November, 2010, 12:00am
UPDATED : Monday, 29 November, 2010, 12:00am

Mainland trade figures for last month show a general decline in commodity imports. Refined metal and ore imports fell across most base metals, with refined copper imports slumping 30 per cent month-on-month to 170 kilo tonnes, a 12-month low.

Bulk commodity imports eased with iron ore imports falling 13 per cent month-on-month and combined net coal imports down 17 per cent month-on-month.

According to analysts Nick Moore and Daniel Major, of Britain-based RBS, risk aversion associated with the Irish sovereign bailout may have been the main cause of the second major price wobble for commodities this year.

However, the impact of policy tightening and the sale of commodities from strategic state stockpiles could potentially have a more significant impact on underlying commodity markets, they say in a research note to clients.

This price wobble could dissuade investors from investing in commodities in the short-term. According to the report, a sharp increase in refined metal imports last year was a key driver of the base metal price recovery. The mainland purchased metal from the international markets, preventing further gains in exchange inventories and leading to inventory erosion for some metals, notably copper. But much of this material was stockpiled on the mainland.

These mainland inventories remained below the radar, until now. Concerns about inflation have led to policy tightening initiatives on the mainland, the latest being a hike of 50 base points in the required reserve ratio. On top of policy tightening, mainland authorities have sold strategic stockpiles of a number of commodities this month in an attempt to curb commodity price inflation. Limiting agricultural commodity price inflation is particularly important due to their heavy weighting in China's CPI basket, the RBS analysts say.

After a sharp correction in base metal prices from their mid-November highs, prices have stabilised. However, additional supply, as a result of sustained sales of Chinese base metal stockpiles, has the potential to weigh on base metal prices in the coming months. Further tightening measures on the mainland may dampen industrial demand for commodities next year, the RBS note says.

In terms of global risk appetite, the markets focus is centred on Europe, but Chinese inflation concerns and policy tightening are not far behind. As the largest consumer of metal, activity on the mainland tends to have a disproportionately large impact on base metal prices.

But analysts are constructive on the medium-term outlook. They say that in light of the potential macro-risk events that could unfold in the coming weeks, they believe more attractive buying opportunities will present themselves before the end of the year. 'We would look for a pull back in commodity prices from current levels to establish fresh long positions,' the RBS research note says. The analysts are bullish about iron ore prices and some commodity strategists even suggest that investors look at funds which invest heavily in iron ore companies.

Despite a decline in iron ore imports last month, the mainland's spot iron-ore prices continue to edge higher. Reports suggest a revival in demand from mainland steel producers, combined with persistent supply issues out of India, have helped to lift the market.

'Reports suggest that despite some closures of small mills due to energy restrictions, the impact on iron ore demand looks to be modest and relatively shortlived,' the RBS reports says.