Best of the Week
Most Popular
1.Stock Market in DANGER of Strangling the Bears to Death - Nadeem_Walayat
2. Germany Pivoting East, Exit US Dollar, Enter Gold Standard - Jim_Willie_CB
3.Flight MH17 – Kiev Flash Mob's Last False Flag? - Andrew_McKillop
4.Stock Market Crash Nightmare! - Nadeem_Walayat
5.Gold - The Million DOLLAR Question... - Rambus_Chartology
6.Gold And Silver – BRICS And Germany Will Pave The Way - Michael_Noonan
7.The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - Nadeem_Walayat
8.The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - Felicity Arbuthnot
9.Which Way is Inflation Blowing? Watch Commodities - Gary_Dorsch
10.U.S. Economy Quarterly Review and Implications for 2014-2015 - Lacy Hunt
Last 5 days
The Big Energy = Power Battle Is Coming - 25th July 14
USrael - Zionists in Control of America's Goyim Brainwashed Second Coming Slaves - 25th July 14
More Weakness Ahead for Gold Miners - 25th July 14
Gold Price Strong Season Starts - 25th July 14
Geopolitics and Markets Red Flags Raised by the Fed and the BIS on Risk-taking - 25th July 14
Gold Lockdown Until Options Expiry - New Singapore Gold Contract Threatens Price Manipulation - 25th July 14
The Bond Markets, Black Swans, and the Tiny Spirit of Santo - 25th July 14
No Road Map For Avoiding The Future - 25th July 14
Israeli War Machine Concentrating Women and Children into UN Schools Before Killing Them - C4News - 25th July 14
Israeli Government Paying Jewish Fundamentalist Students to Post Facebook Gaza War Propaganda - 25th July 14
Why the Stock Market Is Heading For A Fall - This Time Is Not Different - 25th July 14
An Economic “Nuclear Strike” on Moscow, A “War of Degrees” - 25th July 14
BBC, Western Media Working for Israeli Agenda of Perpetual War to Steal Arab Land - 25th July 14
Ukraine: What To Do When Economic Growth Is Gone - 24th July 14
Stock Market Clear and Present Danger Zone - 24th July 14
The Five Elements to Creating a Something-for-Nothing Society - 24th July 14
Instability is the New Normal? - 24th July 14
Israel's Suicide Bombers Over Gaza - 24th July 14
EUR-AUD Heads Into The Danger Zone - 24th July 14
Tesco Supermarket Death Spiral Accelerates as Customers HATE the Mega Brand - 24th July 14
Ukraine MH17 Crisis - Best Remember Who Your Friends Are - 24th July 14
Three Reasons Why Gold Price and Gold Stocks Will Rise - 24th July 14
HUI Gold Bugs Fighting To Break Downtrend - 23rd July 14
What Putin Knows About Flight MH17 - 23rd July 14
Why Microsoft Will Continue to Rebound, Huge Upside Potential - 23rd July 14
Will Putin Survive? - 23rd July 14
MH17 Crash Next Phase Economic Warfare - 22nd July 14
The TRUTH about China’s Massive Gold Hoard - 22nd July 14
Forex Multi-week Consolidation in EUR/USD Ended - 22nd July 14
Bitcoin Price Medium-term Trend Being Tested - 22nd July 14
Beware Of The Flash Mob - 22nd July 14
Can Putin Survive? - 22nd July 14
Israel Assault on Gaza: A Historic Crime, Nazi Like Final Solution - 22nd July 14
Zionist Israel an International Pariah - 22nd July 14
Reflections on the Global Misery Index - 22nd July 14
GDP Economic Statistic : A Brief But Affectionate History - 22nd July 14
TransTech Digest: Super Battery Bio-Power vs. Dirty CleanTech - 21st July 14
How to Find Trading Opportunities in the Currency Markets - 21st July 14
Stock Market One More Pull Back - 21st July 14
The Conquest Of Real - Degenerate Philosophies of the Book - 21st July 14
A Clear Way to Profit from a Graying Population - 21st July 14
Last Chance Critical Financial Market Forecasts Special Total Access - 21st July 14
Stock Market Crash Nightmare! - 21st July 14
Why the Stock Market Is STILL Cheap - 21st July 14
From Gore-Bore To Gore-War - 21st July 14
Gold Price Looking Drab - 21st July 14
An In-Depth Look at Gold Chartology - 21st July 14
The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - 20th July 14
AUD NZD Taking The Forex Bull By The Horns - 20th July 14
US-backed Israeli Invasion of Gaza Unleashes Death and Destruction - 20th July 14
The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - 20th July 14
Stock Market in DANGER of Strangling the Bears to Death - 20th July 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Will China's Residential Construction Bubble Hit Copper, Zinc and Nickel Industrial Metals?

Commodities / Metals & Mining Nov 10, 2010 - 03:01 AM GMT

By: Mike_Stall

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleChina is the world’s largest consumer of copper, zinc and nickel and also among the leading consumers of other base metals. The country has one of the fastest growing auto sector (which has overtaken the US in size) and has plans for rapid expansion of railroads and other infrastructure segments. Not surprisingly, China’s demand growth is expected to be the single most important factor in determining the direction of metal prices.


With a substantial emphasis on infrastructure and construction, the health of the construction sector in China is worth a look to corroborate future prospects of industrial metals. In the present report, we have analyzed China’s construction sector and its likely impact on industrial metals in the medium to long-term. We have divided the construction sector report into two parts to avoid overkill. In this part we will analyze the shape of the residential construction segment, which is allegedly slowing down after a phase of tremendous expansion. In the subsequent part we will emphasize on the more significant sectors of non-residential construction and infrastructure.

China’s residential construction sector comprises approximately 21% of the total construction in the country. China's residential construction market has grown rapidly to about 186 million square meters of new building per annum since the privatization of over 70% of the housing inventory in the last decade. Construction levels in Beijing alone have outpaced construction levels in entire Europe – a testimony to the magnitude of building activities happening in China.

A momentous climb in middle class income levels has led to higher demand for modern day luxury buildings. The swelling population in cities such as Shanghai necessitates higher requirements of new buildings every year. China also has plans to build a number of satellite cities and townships to cope with the massive expansion in the upcoming years. With Japan and the US stagnating, China remains the global hotspot spurring construction investments.

The massive Chinese stimulus with emphasis on infrastructure saw the power and enormity of China’s ability to drag metal prices out of any potential downside. Copper and other industrial metal’s solid performance in the midst of the global recession is evidence of how influential China’s infrastructure spending could be. The impact of the stimulus is yet to wear off and we expect infrastructure activities initiated as part of the stimulus plan to continue pulling up metal demand for some more time yet. Also, China’s emphasis on infrastructure is not a new stand – it only underlines the continuing growth happening in the region. Much of these factors will remain a key driver of metal prices in the upcoming years as well.

Metals Overview

After rallying in 2009, industrial metals have had a mixed year so far in 2010 as the global economic scenario remained weak in the first half. China’s metal imports, a key driver of the rally in the second half of 2009, lost pace leading to speculations that demand for metals in the developing markets is drying up. Although metal prices have picked up over the past few months, the withdrawal of Chinese purchase plans is likely to affect metal prices in the upcoming months.

The World Bank and IMF’s revised global economic growth outlook indicates a marginal improvement in 2011; but the bias is toward a more protracted and muted development. Macroeconomic data from the major economies also indicate a pause in metal prices. The unemployment data from the U.S., Europe and Japan dampen the prospects of metals in the short term. However, the role of developed economies in shaping metal prices is expected to be nominal in the next few years with developing economies accounting for a clear majority of the demand. The silver lining is that the developing nations are continuing to grow at an impressive pace to keep metals supported.

Despite the host of negativity in the metals market, LME and Shanghai copper inventories have witnessed a drastic reduction this year. The supply side has also been showing signs of fatigue – new exploration activities have stalled and ore grades have started to deteriorate. The dollar has also not been strong and that has helped prices of dollar denominated metals. It is evident that demand is a less important factor now in determining copper prices. Nonetheless, investors looking to gain in the long term should be prepared for a correction because of a perceived lull in Chinese demand.

Impressive growth for residential construction in China

China’s construction sector has demonstrated impressive growth in the past few years. In fact, contribution of the sector to the country’s economic growth has increased from a mere 3% in the 1990s to 17% in 2009. The total construction expenditure in 2008 was estimated at approximately USD 1.2 trillion making China the second largest housing market in the world, after the U.S. In addition, China’s construction sector witnessed double-digit growth (compound annual growth rate) during the past decade. That’s a whopping number given that the global growth was in the range of 5-6% during the same period.

Despite signs of a slowdown in property prices and buying in the short term due to overheating of the residential sector, China looks poised to dominate the world’s construction sector leading a healthy demand for base metals. The Chinese construction sector contributes approximately 40% to the domestic consumption of aluminum, copper, nickel and zinc – about 8-10% of the global consumption.

The share of residential construction in China is significantly lower than in the US because of its emphasis on infrastructure spending. However, it still contributes significantly to the growth story in China. In order to gauge the state of residential construction in China, we have analyzed a few critical indicators that give us an insight into the condition of the sector.

Regardless of claims of a slowdown in residential construction, residential real estate investment data from the National Bureau of Statistics of China shows that the y-o-y YTD growth has been up by close to 35%, even marginally better than the growth in commercial investments. This is well above the global average and clearly better than investment in real estate in most of the developed regions post recession.

Buildings completed data also displays a robust growth in the past two years. This is primarily a government stimulated recovery through fiscal support and considerable easing in lending. Such a measure is not a long term support for construction - a slowdown in residential construction is impending. However, the palpable difference in the growth rates of China and other developed economies ensures that even in the event of a correction, China’s growth rate will be sufficiently superior to support metals demand. Other indicators such as the FDI investment in the construction sector, house prices index and the “Residential Real Estate Climate Index” also demonstrate that the construction sector had bottomed out by 2H08, and movements in the residential market could only be upward.

Drop in prices possible but growth in construction to continue

One of the primary concerns engulfing the residential market in China currently is an impending correction in property prices.  The subtle but steady drop in housing prices in 2010 indicates that the overvalued residential market has scope for price corrections. The Sales Price Indices of New Buildings in 70 Medium-Large Sized Cities, a measure of residential house prices in China, has been hovering around the 110 mark (on a y-o-y basis) throughout 2010. This index highlights that while the sector is still growing y-o-y, the m-o-m growth in prices has not been able to replicate the augmentation levels observed in 2008-09.

Additionally, the “Real Estate Climate Index” has been dipping consistently over the past few months on an m-o-m basis. These indexes point to a long-drawn-out growth in the residential housing sector as opposed to a sharp one. However, while stagnation in prices of housing property does not augur well for construction activity, under the circumstances it is not indicative of drop in construction (and hence demand of metals).

Much of the correction in prices that analysts anticipate can be attributed to the government’s efforts to restrict speculation in the real estate market by encouraging higher down payments and mortgage rates for buyers, encouraging construction of affordable houses and restricting purchases by non-residents. China’s housing prices to income ratio is at a historical high and a pressure on prices is imminent. However, there has not been a let up in sales. If at all, lower prices and stricter government controls has been attractive for residential property from the retail buyer’s point of view. The amount of assets being built is not slowing-the volume of construction starts was up 55% from a year earlier in June. Total investments in real estate are also up from a year earlier.

New trends in urban housing to need more metals

A lot of talk about the residential construction sector, but what about metals? Metals will not only gain from the overall growth in residential construction in China but also from the fact that new activities will be led by urban housing, which is now witnessing a paradigm shift – furnished apartments instead of ordinary homes. New housing units data in China over the past decade shows a clear trend of rising luxury homes in comparison to affordable housing.

The use of metals in a typical Chinese home has been steadily increasing over the past few years as a result of emphasis on the luxury segment. A common Chinese home requires 33 kg of copper and 45 kg of aluminum, while the average furnished luxury home requires 180 and 200 kg of the two metals, respectively. The anticipated housing bubble may dent the growth of the luxury segment in the next few years, but even at reduced levels, this segment is likely to far outweigh the affordable segment in size.

No housing bubble – residential construction in China still strong

Finally, why should China’s march in residential construction continue? The key word is affordability. Household incomes are significantly higher in China than that indicated by official statistics. The average house price in 2008 is believed to be around four times the average disposable household income, after taking "grey income” into consideration. This is similar to numbers in the US in the same year.

However, there is a huge difference between the US bubble and the purported Chinese bubble. In the United States the bubble was all encompassing and drove up prices across all income groups and building segments. In China, housing construction is largely concentrated in the luxury high-end segment and it is this segment that is experiencing a drag in prices. In that sense, the bubble is restricted to the top income group. Prices will come down as the government promotes affordable housing instead of luxury buildings (overall construction is not impacted) but from a metals demand perspective, the fundamentals are still intact.

Moderate growth estimates in China suggest that base metals will likely witness an average 0.5-1.5% increment in demand. If the 10-15% growth witnessed in the past few months sustains, it would revive the global demand for base metals by approximately 2 percent. In the current scenario, we believe that a moderate growth in the residential sector is certainly plausible and this supports medium to long-term prospects for industrial metals.

The primary dilemma of investing in metals is that they more closely follow market and economic conditions than precious metals. This makes metals susceptible to wide corrections – for superior returns, it is essential to time the markets well. Be well armed with proper entry points and expert advice to extend gains likely from the key support from China. To put the above analysis into proper perspective - please remember to that precious metals outperformed industrial metals at the final stage of the bull market of 70's - 80's, so while diversification between various commodities might be a good thing to do, forgetting about precious metals at all is definitely not recommended.

If you are interested in knowing more on the market signals we analyze, we encourage you to subscribe to our Premium Updates to read the latest trading suggestions. We also have a free mailing list - if you sing up today, you'll get 7 days of full access to our website absolutely free. In other words, there's no risk, and you can unsubscribe anytime.

Thank you for reading.

Mike Stall
Sunshine Profits Contributing Author
Sunshine Profits

    Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

    Sunshine Profits provides professional support for precious metals Investors and Traders.

    Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free trial to see if the Premium Service meets your expectations.

    All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

    By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014