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By Stuart Burns

Contrary to some points that we covered in Part One, not everyone agrees we are in for a prolonged period of falling steel production and lower raw material prices.

Falling thermal coal prices have as much to do with rising coal supply as lack of demand. Shale gas in the U.S. has replaced coal consumption for electricity production to a near-35-year low, according to DOE figures in the FT, leaving thermal coal producers offering supplies for export and depressing prices.

Falling iron ore prices are said to be due to the anticipation of increased supply from Australia and India, combined with an end to weather-related disruption at Vale’s Brazilian mines. As prices have fallen, Chinese consumers in particular have differed shipments and even canceled contracts, preferring to draw down stocks. Goldman Sachs sees this as a positive for second-half consumption, arguing the Chinese will have to come back into the market and are probably waiting for lower prices.

Who is right? That remains to be seen. Comments by Premier Wen of China reported in Reuters this week suggest the Chinese are intending to embark on a new round of infrastructure investment to boost domestic growth and ensure the slowdown is not a stand-still. Wang Jun, an economist at the China Centre for International Economic Exchanges, a government think tank, is quoted as saying he expected the thrust of the investment to focus on highways, railways, nuclear power and thermal power plants.

Any such stimulus is not going to be on the scale of 2009/10. China’s labor market is still tight and inflation could be re-ignited with too much aggressive state-sponsored expansion, but it shows Beijing is going to actively support growth and the smart money should be on demand picking up again in the second half.

The second and third quarters may represent the trough in what could prove to be a return to growth later this year and next.