China looks at buying 'cheap' base metals as strategic reserve

Reports suggest China is considering buying perhaps $3-$4 bn worth of base metals on the open market as state and commercial reserves to help boost economy.

HONG KONG (Reuters) -

China is looking at buying base metals as state or commercial reserves to take advantage of the lowest prices for years and bolster weak demand, industry sources said on Friday.

They said Beijing may be considering at least two proposals -- one for all base metals and another just for copper and aluminium. The metals could be purchased by the State Reserve Bureau (SRB) or commercial entities controlled by the government.

"The proposal was for all base metals," an analyst at a state research unit said, without giving details.

But a senior executive at a large aluminium smelter said the Ministry of Industry and Information Technology had proposed the government increase state copper and aluminium reserves. He did not provide proposed tonnages or timing.

A sales manager at an aluminium smelter said he had heard that the proposal advocated the government use 20-30 billion yuan ($2.93 billion-$4.39 billion) to buy up base metals for its reserves.

If it goes ahead with purchases, the world's top consumer of copper and aluminium could end up importing more refined copper and nickel and cutting into domestic stocks of aluminium, lead, zinc and tin.

Prices of base metals have slumped since July on weakening demand, with the losses accelerating over the past few weeks due to the global economic crisis and China's own slowdown, forcing metals smelters to slow production and cut jobs.

Beijing, keen to help strengthen smelters as it looks to bolster the economy, is changing a long-established policy of restricting expansion in the resource-intensive metals industry.

China's cabinet, the State Council, is planning to step up purchases of important materials and resources for its state and commercial reserves, the government said in a statement this week, without specifying.

"I think there is a good chance that the SRB will buy copper, given the current price ratios between the LME and Shanghai, and low domestic stocks," said Liang Zhigang, analyst at Minmetals StarFutures in Shenzhen.

He said the SRB might buy at least 400,000 tonnes, about one month's consumption in China, as the first step, if the government approved the stock-building plan.

That amount of copper would cost China $1.464 billion at Friday's prices.

Industry sources said they had not seen signs of SRB buying copper in the domestic market, while aluminium reserve purchases could come soon.

The buying of aluminium reserves may have been approved by the government, which would benefit Chinalco, the parent of Aluminum Corp of China Ltd (2600.HK)(601600.SS), China's top producer, industry sources said on Friday.

The government might ask state-owned investment arms to buy up to 1 million tonnes of aluminium from state-owned smelters between December and June next year in stages, a smelter source said.

Analysts and industry sources said purchases could push up copper prices, while aluminium prices could have a short-lived rise, given the huge stocks in the domestic market and China's persistent surplus.

China's merchants and smelters, including state-owned Chinalco, held a total of more than 1 million tonnes of aluminium at warehouses and smelters' yards, about one month's output.

Last week, Wen Xianjun, head of the aluminium division at the state-funded China Nonferrous Metals Industry Association, also told Reuters the industry body had suggested the government buy aluminium for the state reserves. ($1=6.83 yuan) (Editing by Michael Urquhart)