Commodities bullish despite correction

COMMODITY markets falling nearly 20 per cent during the third quarter have undermined confidence in the resources super-cycle, but some commentators say it is a temporary correction, with longer-term fundamentals "completely unchanged".

The prices of commodities such as copper have corrected substantially amid fears that Chinese growth is slowing at a time when the US and Europe are reporting little or no growth. A 24 per cent drop in Chinese copper imports during the January-to-July period helped cement those concerns.

But analysts say China's massive economic growth cycle has a long way to go. A post-Olympics resurgence in infrastructure projects, along with further fine-tuning of government policy to shift focus to sustaining growth from fighting inflation, will provide a new lease of life to the derailed metals rally, they say.

"This correction is similar to those of May 2006 and May 2007 that were also prompted by concerns about the (lack of) robustness of China's economic growth," said Tom Price, commodity analyst at Merrill Lynch in Sydney.

Even the current news flow -- "commodities' bubble has burst" and "China's run is over" -- sounds like 2006 and 2007, but the general growth in commodity demand was intact or within reason, Mr Price said.

Analysts said the long Labor Day weekend (Monday) in the US, the unofficial end to summer holidays, would bring clearer trading direction, as liquidity improves and normal economic activity in the northern hemisphere resumes.

"I definitely see an uptick in Chinese demand," said Catherine Virga, base metal analyst at CPM Group in New York. There were signs of "definite destocking of unreported stocks from Chinese consumers".

Copper looked poised for a firm rebound during the fourth quarter, amid signs of a tightening Chinese domestic copper market after months of de-stocking, analysts said.

Energy problems in China, the biggest producer of aluminium, should put a floor under prices of that metal.

"A lot of infrastructure projects that were postponed during the Olympics will be resumed in the fourth quarter. Also there's the earthquake spend," Citigroup commodity analyst Alan Heap said.

As bearish news from Europe mount, the focus on China as the commodity markets' saviour has intensified, with markets starting to seize on data sets, such as electricity consumption, that previously did not feature strongly in shaping sentiment, Mr Heap said.

"The only voices I am currently listening to are from the management of the global resource companies. They are at the coalface of demand and supply, and they remain undeniably bullish," said Charlie Aitken, head of institutional dealing at Southern Cross, in Sydney.

Mr Aitken's bullish views followed comments by chief executives of two of the biggest global miners, Marius Kloppers of BHP Billiton and Tom Albanese of Rio Tinto.

"If I look at the long term, there is nothing that changes my view about where China is going," Mr Kloppers said while announcing the company's full-year earnings recently.

Rio's Mr Albanese echoed similar views. "There is no question that we are living in an era of unprecedented demand for minerals and metals, and we believe rapid demand growth and supply-side challenges will be maintained," he said.

But what has changed in the past few months is the way cautious optimism has taken the place of outright bullishness in the commodities market.

"(What) concerns me is that we will continue to see weak numbers, for example in (China's) electricity consumption and steel production, which are Olympics-related, but won't be published for a while simply because of the usual lags in data," Citigroup's Mr Heap said.

That might undermine prices during the fourth quarter, but the outlook for 2009 remained robust, he said, adding the bank was maintaining its bullish view that copper would average $5 per pound next year.

The most active December copper contract fell US4.45c tosettle at $US3.4005 a pound on the Comex division of the New York Mercantile Exchange yesterday.

http://www.theaustralian.news.com.au/story/0,25197,24263899-643,00.html

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Commodities bullish despite correction