Commodity Blog

Commodity news, technical and fundamental analysis, market data on precious metals, energies, industrial metals, and soft commodities


Govt Measures to Distort Commodities, Prolong Downturn

December 11, 2008 at 9:26 by Mario

Government interventions, particularly in China, are likely to distort many commodity markets, resulting in even lower prices as producers maintain production levels thanks to government subsidies and tax cuts, Citigroup said in a report Wednesday.
China has reduced electricity tariffs and lowered export taxes to help the aluminum industry, and cut export tariffs on flat steels. India has repealed an 8% export tax on iron ore fines and reduced taxes on lump product to 5% from 15%.
“We believe government subsidies could remain in effect for many years,” Citigroup said. “Just as the developed world seeks to protect and support automotive and banking industries, developing economies will seek to support their relatively new smelting and material industries.”
China has yet to issue coal export quotas for 2009, but the government has removed price caps, a signal that export controls are easing, Citi said.
“Given the sharp slowdown in power consumption, thermal coal exports from China could sharply increase, a major risk to seaborne prices,” the bank said.
Acquisition Spree Renewed
China’s price interventions could also be stepped up as it mulls proposals to build government stockpiles, such as the State Reserve Bureau considering copper, aluminum, steel and other raw material purchases for strategic reserves, Citi said.
Meanwhile, Beijing appears to be encouraging renewed overseas corporate acquisitions to ensure secure raw material supplies in an environment where many companies are struggling to refinance debt and raise funds to develop projects, Citi said.
Only this week, China’s Shenzhen Zhongjin Lingnan Nonfemet Co. (000060.SZ) emerged as the main contender to win control of Australian zinc miner Perilya Ltd. (PEM.AU) by taking part in a A$45.5 million share placement.
Meantime, China’s Yanzhou Coal Mining Co. (1171.HK) is carrying out due diligence on coal miner Felix Resources Ltd. (FLX.AU) ahead of a possible takeover bid, according to a person familiar with the situation.
With increasing debt refinancing issues hitting the metals mining sector, merger and acquisition opportunities are becoming increasingly attractive, Citi said, but many companies and sovereign wealth funds “are still gun shy given losses on existing investments and continued deterioration in economic data, and may wait for a clear picture to emerge on 2009 demand.”

Leave a Reply