China’s £98bn Infrastructure Plan Boosts Commodities Prices

on Sep 13, 2012

Industrial metal prices rose for a second day on Monday (September 10) on the back of hopes that China’s approval of a £98 billion investment in infrastructure projects would revive steel demand, providing fuel for a recovery in commodities prices. After two days of steep price gains, however, traders and analysts raised concerns that Beijing’s spending plans may not be enough to sustain a stable demand pickup in the sector.

On Monday, copper and aluminium prices hit four-month highs, with copper for three-month delivery on the London Metal Exchange rising 1 per cent to $8,066 (£5,018) a tonne and aluminium gaining 1.9 per cent to $2,057 (£1,280) a tonne. Meanwhile spot iron ore posted its biggest one-day gain ever recorded by the Steel Index, jumping 6.7 per cent to $95 (£59) a tonne. As a key ingredient in steelmaking, iron ore is correlated to the profit of a number of mining companies, which following the metal’s price gain saw an uplift in their market value. Shares in the Brazilian miner, Vale (NYSE:VALE), gained over 5 per cent, while the British mining company, Rio Tinto (LON:RIO), rose 1.6 per cent.

!m[](/uploads/story/350/thumbs/pic1_inline.png)The recent rebound in the industrial metal markets followed Beijing’s announcement of a new infrastructure plan — an investment push designed to help support growth in the stuttering Chinese economy. On Friday (September 7) Beijing’s economic body, the National Development and Reform Commission, approved plans to boost expenditure outlay on railways and subways, as well as road construction, nine sewage treatment plants, five port and warehouse projects, and two waterway improvements. Analysts estimated the cost of these projects at more than 1 trillion Yuan (£98 billion), or 2 per cent of the country’s gross domestic product. The amount of the investment is also about a quarter the size of China’s last stimulus package unleashed in response to the global financial crisis in 2008.

The recently-announced infrastructure building plan has boosted steelmakers’ and traders’ hopes that the investment may lead to a resuscitated demand for industrial metals. Yet many analysts warned that the price rally might be just a short reprieve as the size of the planned outlay is much smaller than the previous stimulus package and it will be spread over a longer period of time. This means that while demand may temporary increase for most industrial metals, it is unlikely to significantly influence long-term gains and lead to a fundamental change in demand.

“The news of a trillion Yuan being injected into infrastructure spent in China was the biggest catalyst for today’s jump to the upside. Compared to 2009 though, when nearly 15 trillion was injected, this is small cheese. When you take a step back and look at this, it is not really that significant and this could be just a knee jerk reaction. Perhaps prices will continue to fall further after the dust settles,” London Dry Bulk, an iron ore brokerage, said in a report.


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