Declining prices of industrial raw materials, despite occasional
rebounds, are expected to help boost corporate earnings in 2007,
economists and stock analysts said.
"Companies that specialize in processing base metals are
expected to benefit the most from the falling prices of raw
materials," said Du Xiaohua, an analyst with China International
Futures (Shanghai) Co Ltd.
Manufacturing companies that use large quantities of metal parts
also stand to gain from falling prices. Du and others said lower
prices would have a significant impact on the bottom lines of
export firms operating in highly competitive overseas markets with
slim profit margins.
The commodity market rally that sent the prices of various
metals, especially copper and aluminum, to dizzying heights last
year began to fizzle out toward the end of 2006.
On the London Metal Exchange (LME), the copper price slid 35
percent from its highest level of $8,800 per ton last May. The
aluminum price also fell 25 percent from a record high of $3,300
per ton. It has since recovered by about 15 percent.
Prices of these key metals on the Shanghai commodity market have
largely kept pace with the international trend, which is dominated
by rising inventories in producing and consuming countries. The
Shanghai commodity market has been further affected by the massive
diversion of investment funds to the booming stock market in recent
months.
The fundamentals of the Shanghai metals market are not expected
to change significantly in coming years, according to industry
experts.
The large inventories of base metals are expected to be more
than sufficient to meet strong demand for fast developing
infrastructure construction in the coming years.
For example, China plans to invest more than 200 billion yuan in
the construction of an inter-city rail transport system during the
11th Five-Year Plan period (2006-10).
According to a recent report released by Yunnan Aluminum Co Ltd,
the tumbling price of alumina since the second half of 2006 has
contributed to big profit growth for the company.
Alumina is a major raw material in processing aluminum ingots,
which are used for aluminum products such as window frames or
engine parts. The company estimated an increase of 100 to 150
percent in net profit for 2006.
However, Gaoxin Zhangtong, a copper tube maker based in Jiangsu
Province, said fluctuations in the metals market will have little
direct impact on corporate earnings this year because the price had
already been fixed in existing contracts with copper suppliers.
"Our company mainly makes profit from charging processing fees,"
a Gaoxin Zhangtong employee who did not wish to be named told China
Daily.
"Falling prices of commodities have the function of improving
the capital efficiency of most corporations by allowing them to
reduce costs and adding value to their products," said Xi Junyang,
a professor at the Shanghai University of Finance and Economy.
Meanwhile, rising prices of agricultural products including corn
and soybeans are seen as a boon for Chinese farmers.
"Agricultural products are expected to maintain the upward curve
in the long term. And we are happy to see the trend continue," said
Jin Dehuan, also a professor at the Shanghai University of Finance
and Economy. "The rising prices of agricultural products will
increase farmers' income."
(China Daily February 8, 2007)