New Market Study Published: China Metals Report Q3 2013

The metals industry in China will be facing a period of steady decline in demand and supply growth over the coming years. We believe the boom years of Chinese investment-led growth are over and this will seriously undermine growth of China's metals industry, particularly steel and aluminium. Indeed, we expect the recent economic rebound in China to surrender to structural headwinds in H213.

We believe the metals industry in China will be facing a period of steady decline in demand and supply growth between 2012 and 2017. On the demand side, we are expecting a sharp slowdown in Chinese fixed asset investment that will see a softening in demand across all industrial metals. We expect construction activity in China to moderate significantly in the coming quarters despite a temporary boost from infrastructure stimulus packages. We forecast Chinese real GDP growth of 7.5% in 2013, compared to Bloomberg consensus forecasts of 8.1%. We believe the boom years of Chinese investment-led growth are over and this will seriously undermine growth of China's metals industry, particularly steel and aluminium.

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Government plans to significantly consolidate the metals and mining industries will be watered down in the coming months due to our expectation for a renewed slowdown in China's economy in H213. In order to cushion the negative impact on social welfare and stability of slower growth, central government will support loss-making state industries as a form of social subsidy. To highlight, China's State Reserves Bureau (SRB) purchased more than 300kt of primary aluminium for delivery between April 1 and May 31. Indeed, the purchases by SRB, which equates to 17% of the country's aluminium output in February, formed part of a move to support the floundering Chinese metals industry.

Nonetheless, consolidation will eventually occur due to slumping profit margins, weaker metals prices and a reorientation of China's economy away from fixed asset investment and towards private consumption. Lower prices will squeeze margins and force smaller, inefficient producers out of business. State-owned companies already have a dominant role in the mining and metals industry and will have an even larger share of the economic pie by 2017.

Despite slowing consumption growth, China will retain structural deficit for key metals such as iron ore, copper and nickel. Imports of metal to the country will continue to grow, albeit at a far slower rate than over the last 10 years. As such, overseas acquisitions of foreign mining assets will continue to be a trend.

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