Cooling unlikely to curb rise in metals

Copper, tin rally set to continue even as China raises borrowing costs

SINGAPORE - China's decision to fight inflation by raising borrowing costs for the first time since 2007 may not curb gains in copper and tin, and is unlikely to restrain demand in the world's largest metals user, traders and analysts said.

"It's not a big increase and is unlikely to have much impact except bring about a knee-jerk reaction, but it signals the government's attitude toward wanting to rein-in liquidity and fight inflation, rising property and food prices," Zhang Yan, a trader at Jin Yuan Futures Co, said from Shanghai. China's move may prompt a temporary retreat of speculative money in metals, HNA Topwin Futures Co analysts including Tan Wentao wrote in a note.

The People's Bank of China on Tuesday lifted the benchmark one-year lending rate to 5.56 percent from 5.31 percent, and increased the deposit rate to 2.5 percent from 2.25 percent. Economists hadn't anticipated the move this year, according to 13 of 19 forecasts in a Bloomberg News survey.

"Looking at history, the rate-increase cycle usually accompanies gains in metals prices, so the decline will probably be a temporary thing," said Zeng Chao, an analyst at Everbright Futures Co.

Copper on the London Metal Exchange (LME) climbed 12 percent this year, gaining to a 27-month high of $8,492 a ton on Tuesday, as shrinking global inventories signaled robust demand and as the dollar weakened.

Tin soared 55 percent this year, making it the best performer on the LME, reaching a record $27,338.50 a ton on Oct 14 on concern that supply will lag behind demand. The LME index of six industrial metals is up 11.4 percent this year.

China's rate increase extends measures taken this year to rein in record loan growth and asset bubbles in the world's fastest-growing economy, including curbing loans for third-home purchases, increasing down-payment requirements, raising mortgage rates and increasing bank reserve requirements.

China won't change policies on property, local financing vehicles, energy saving and emissions-cutting in the short term, the Financial News said, citing central bank adviser Xia Bin.

Inflation risks are rising in China on record property prices and rising raw-material costs.

Corn, soybean and palm oil futures on the Dalian Commodity Exchange have risen for three straight months. Cotton climbed 28 percent last month, while wheat gained 14 percent on the Zhengzhou Commodity Exchange.

Economic growth may sustain China's metals demand, the traders and analysts said. China's economic growth may be 9 to 10 percent this year, the Financial News reported on Wednesday, citing Xia.

Copper inventories in LME warehouses have dropped 26 percent this year, while stockpiles in Shanghai dwindled 45 percent since reaching a six-year high in April.

Bloomberg News

(China Daily 10/21/2010 page17)