Why China is stockpiling base metals

LONDON (Commodity Online): After a relatively quiet week, this week might see more movement in prices. But in the absence of any major data releases, we don’t expect large movements today. However, risk appetite in the broader financial markets remains decent, which should provide downside support for the complex. Bargain buying on dips might continue. Apart from the usual variables which have been given intra-day direction to base metals, e.g. the US dollar and changes in equity markets, all eyes will be on China’s Q3:09 GDP growth figures on Thursday. Since China remains the single biggest consumer of many metals, a strong growth figure could indicate that much of the stockpiling of metal in China has been justified. The market expects China to post GDP growth of close to 9% for Q3:09. Electricity production in China is a good indicator of real economic activity. After a very slow start to the year, production has risen sharply since July, outpacing production during the same period last year. This is a good indication that real economic activity is higher than it was in Q2:09. Trading volumes so far today have been light, with some buying coming through after copper and aluminium both closed slightly lower on Friday. However, expectations of strong GDP figures, combined with a weaker dollar is supporting the red metal today. Copper stocks declined 1,125 tonnes, with most of the metal flowing out of New Orleans. This continues to recent trend in copper stock shifting to Asia (refer to Commodities Daily 16 October 2009). With crude oil pushing higher late Friday afternoon in New York, combined with a weaker dollar this morning, aluminium is finding additional support today. The metal managed to break back above the $1,900 level this morning. However, after initial buying this morning, interest has faded. Zinc, nickel and lead remain range-bound and should continue to look towards copper for direction. The 10-day correlation between copper and nickel, zinc and lead is high at 0.92, 0.73 and 0.70 respectively.