The Sleeping Dragon


Whenever we talk of base metals the importance and significance of China is very important to understand. China consumes 40% of total base metals produced. China can significantly alter the price of metals with their consumption pattern. Chinese economy is cooling with GDP projections of 6.5% which is slowest in the last 2 decades. This can be assumed as a negative factor in base metals demand. The banking sector in the country is going through a transitory phase. Premier of the People’s Republic of China Li Keqiang wants YUAN to be an alternative for dollar in world trade and trying to make the financial markets more transparent.

We can discuss a particular case which happened last year in Qingdao port where investigations by authorities revealed that metals imported and used as a collateral were duplicate .The duplicate copy was used to obtain multiple loans .Funds obtained were diversified in other sectors. With Chinese authorities clamping down on such shady deals, the financed metals i.e.. Nickel was dumped in L.M.E. registered warehouses creating over supply and depressed premiums in the physical market putting pressure on the prices in the short run.

With unimpressive figures coming from the manufacturing sector China has already cut the reserve requirements of banks this year in order to lower borrowing costs for businesses in a slowing economy. The announcements caused increased volatility in the metal markets. CHINA is expected to cut interest rates further this year to boast a slowing economy. Crude oil prices have managed to stage a recovery but inflation is still low and the Chinese authorities have still room to decrease interest rates this year. Also they can resort to additional stimulus measures to kick start the economy and create demand for metals. We will have to carefully read and understand the data coming out of China in the coming months in order to take a call whether there has been any meaningful recovery in the Chinese economy and hence create a sustainable demand for base metals.

Lack of interest among the trading community and with demand being depressed price of base metals has negative tones. But with increased corporate profits there can be increase demand for industrial metals in the medium term . Political volatility can certainly alter the demand curve.

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