As China chills, metals heat up

When it snows in China, the rest of the world's metals industry doesn't catch a cold, it gets healthier.

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For years, metals markets and mining companies have been closely following the Chinese economy as its rapid growth and demand for raw materials fuelled the biggest metals boom in history. Now, those same players are watching the weather in China just as intently, to gauge where metals prices might be headed next.

China is under siege from the worst snowstorms to hit the country in half a century. Snow has been falling in much of eastern, central and southern China since Jan. 10. The resulting chaos has sharply reduced the supply of coal to Chinese power generating stations, knocking out electricity or reducing supply to major aluminum and zinc smelters.

“The big concern with China is that a lot of their industrial machinery, particularly their high-energy smelting operations, are being curtailed.

It's a big part of the metals markets,” David Davidson, a mining analyst at Paradigm Capital, said in an interview.

China is the world's biggest producer of both aluminum and zinc but production has suddenly been cut back because of the severe weather, raising prices and the prospects for producers in other parts of the world.

China's largest zinc smelter, the Zhuzhou Smelter Group Co., has cut production because of the power shortages, a company official told Bloomberg News yesterday. China's annual aluminum production of roughly 12.6 million tonnes will be reduced by 300,000 tonnes because of the smelter shutdowns, according to Beijing Antaike Information Development Co., a metals consulting firm.

By some estimates, as much as a tenth of China's metal smelting capacity has been brought to a standstill by the power shortages and bad weather, prompting strong price gains for metals including aluminum and zinc on fears of dwindling supply.

Aluminum prices posted their biggest one-day gain in 16 years on the London Metal Exchange Wednesday, before falling back. Aluminum for delivery in three months gained as much as 5.5 per cent to $2,654.50 (U.S.) a tonne, the largest one-day advance since January, 1992.

Spot aluminum hit a six-month peak of $2,715 a tonne, but erased its gains later in the day, closing down $9 at $2,641.

Zinc prices also rose sharply before retreating at the end of the trading session.

Because China is such a large producer of both aluminum and zinc, the metals, and aluminum in particular, have failed to enjoy the massive gains experienced by commodities that China needs to import, such as iron ore, copper and nickel.

If Chinese producers continue to experience power shortages, however, China could once again become a net importer of aluminum, according to some analysts.

“These kinds of capacity restrictions could accelerate China's switch back to a net importer of aluminum,” said ANZ senior commodities analyst Mark Pervan.

Last year's $38-billion takeover of Montreal aluminum giant Alcan Inc. by Rio Tinto PLC was driven in part by expectations that Chinese aluminum demand will increase sharply.

However, if the storms continue to affect China's overall economy, demand for all metals could weaken. Fallout from the snow storms have already caused more than $3-billion in economic losses, according to China's civil affairs ministry.

Toronto-based zinc producer Breakwater Resources Inc. was among the top gainers in the mining sector yesterday, rising 10.3 per cent on the Toronto Stock Exchange. Mr. Davidson, however, said the gains were in part owing to increased speculation that Winnipeg copper and zinc producer HudBay Minerals Inc. could bid for its smaller rival.