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China drives metal prices

November 25, 2010

“China remains the biggest driver of base-metals demand and, hence, prices. Fiscal tightening later in the year will dampen demand for resources, putting a ceiling on prices. At the same time tight credit for Western producers will hamper their ability to expand capacity, limiting supply and supporting prices.”

Source: Economist, November 22 2010

Observations:

  • The Economist identifies strengthened fiscal policy in China and credit shortage hampering capacity increases in the West as the most important drivers for metal prices in 2011.
  • Gold price is expected to rise approx. 10% and copper price approx. 7%, while aluminium price stays stable and steel price drops 17%.

Implications:

  • It is unlikely that the credit shortage will have significant impact on the commodity prices in the short term. As capacity expansion projects typically have long lead times the availability of credit does not impact the available capacity in 2011 much.
  • Tax rate hikes in China are planned to limit the growth to ‘sustainable levels’, which could reduce the Chinese demand of construction materials significantly and reduce steel, copper and aluminium prices. However, even at moderate Chinese growth levels demand increases will force miners to add capacity.

©2010 | Wilfred Visser | thebusinessofmining.com

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