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)