CBA: Chinese suppliers are cutting output and that's good news for commodity prices

BEIJING, CHINA – FEBRUARY 18: (CHINA OUT) A worker gathers coins thrown by tourists into a well to pray for good luck and wealth during celebration for Chinese New Year at White Cloud Temple on February 18, 2007 in Beijing, China. Chinese worldwide are celebrating the Chinese Lunar New Year of the Pig. (Photo by China Photos/Getty Images)

Commodity markets in Shanghai had a mini-crash last week before rebounding to unwind most of the steep losses. Part of the reason for the rebound, according to analysts at Deutsche Bank, is because industrial commodity markets might finally be getting back in balance.

It’s a theme picked up on by the Commonwealth Bank’s commodity team in their “Daily Alert” note for clients this morning. Vivek Dar and Kofi Mensa said that the rebound was related to “views China may reduce output of industrial metals as China’s major suppliers meet to discuss the fall in commodity prices.”

That’s a big deal because China is such a dominant player in global commodity markets. There is also a growing view that the Chinese government is about to buy metals to support prices and that it is “also thinking about limiting futures short selling”, both likely to support markets.

That view was formed by traders after media reports that “China Nonferrous Metals Industry Association has reportedly asked the National Development Reform Commission (NDRC) to step into the market and purchase industrial metals to boost prices.”

They say this will “bode well” for base metal prices if companies can “adhere to any output cut” but the turn in sentiment could be enough to to turn the price outlook.

It won’t fix the fundamental “oversupply and overcapacity in China’s secondary sectors,” which can re-emerge at a later date. But the CBA team believes “aluminium, steel, alumina and zinc” will be the big winners if Chinese supply does fall.

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