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These 5 factors could decide China's metals demand in 2017

Workers at the Zhong Tian (Zenith) Steel Group factory in Changzhou, Jiangsu.
Kevin Frayer | Getty Images
Workers at the Zhong Tian (Zenith) Steel Group factory in Changzhou, Jiangsu.

An extension of this year's price rally in base metals and bulk commodities in China into next year will depend on these five important factors, investment bank Goldman Sachs wrote in a note Friday:

Property demand

Despite restrictions to curb rapid price appreciation in tier 1 and 2 cities, property investment and new projects remain resilient with investment up 6 percent in November from a year ago and new projects up 5 percent in the same period.

Previous experiences from 2008, 2010-2011 and 2013-2014 also indicate that, even when Chinese property price growth started to decelerate, investment growth continued to be supported in the following 12 to 18 months, before declining significantly, wrote Goldman Sachs analysts in a note.

Liquidity

Real interest rates—interest rates adjusted for inflation--are modest in a loose financial environment, said Goldman.

"A tightening of monetary policy does not necessarily lead to strength in property investment and metals demand. In our view, it is real rates that drive property investment…because real rates reflect actual capital costs and effectively affect investment decisions," wrote Goldman analysts.

Infrastructure

The Chinese government is likely to continue spending on infrastructure into 2017 as policymakers "remain determined to maintain a high level of GDP growth," the investment bank said. Beijing, it noted has committed to 6.5 percent average GDP growth over the second half of this decade.

China has invested heavily in infrastructure projects.

In May, the Chinese government said it plans to invest CNY4.7 trillion ($720 billion) on 303 transport infrastructure projects over three years.


Supply-side reform

The Chinese government is mopping up excess capacity in many sectors that will result in a supply shortage in 2017.

Supply contracted across a number of commodities including coal, crude steel and iron ore, the investment bank noted.

Re-stocking

As a result of supply-side management and credit easing to stimulate demand to keep growth up, China will need to replenish its commodities stockpile.

At the same time, investment in China's mining and smelting has been moderately weak, suggesting cautious production expansion.

"Therefore, if demand growth does prove to be strong while capacity growth pauses, we should be able to see prices remain elevated for longer," Goldman said.

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