Andy Hoffman

From Monday's Globe and Mail Last updated on Monday, Jul. 27, 2009 06:46AM EDT

A stunning price rally in base metals driven by voracious stockpiling in China has come to an end, but a long-awaited increase in demand from the United States and Europe is expected to partially offset any slowdown.

The world's largest mining company, BHP Billiton Ltd., has offered the first indication since the market crash and the onset of the global recession last fall that customers in North America and Europe are starting to buy metals again as the economic recovery takes hold.

In a statement accompanying its annual production report, BHP said it believes that underlying demand trends for metals are being masked by de-stocking and stocking activities. The mining giant said that prices will be influenced by the industry's supply response.

"China inventory build is essentially complete, while we are now seeing evidence that restocking has commenced in North America, Europe and Japan," BHP said last week.

China is the world's largest commodity buyer and its aggressive importing of copper has been the key driver of an 81-per-cent rally in prices this year that has supported an impressive rebound in many Canadian mining stocks. China's strategic stockpiling and metals demand, created by a massive $585-billion (U.S.) stimulus program that has focused heavily on infrastructure spending, has proven a saviour for the metals sector that teetered on the brink of wide-scale collapse late last year.

Yet the Asian economic superpower has also recently increased its own production of commodities such as aluminum, nickel, molybdenum and zinc. That has prompted Na Liu, China strategist for Scotia Capital in Toronto, to temper his enthusiasm for commodities.

"With more evidence of a supply-side response, and sharply higher sector valuations after the recent rally, we now choose to be less bullish and more neutral," Mr. Liu told clients in a report Friday.

The analyst said he may downgrade the global raw materials sector from "overweight" to "market weight" on further signs of slowing Chinese demand or an increased supply from the metals industry.

"Given the accelerating Chinese economy, as well as the emerging re-stocking process in the rest of the world, we are definitely not bearish. We just want to flag the warning signs of potential supply-side response and the recent quick runup of equity valuations," Mr. Liu said.

An economic recovery in North America and Europe is essential to creating sustained demand for metals. As Western consumers start spending again, output by Chinese factories producing electronics, appliances and furniture for export will increase and add to the growth of the Chinese economy.

Japan's Sumitomo Metal Mining Co. Ltd. recently said that China's copper imports are slowing after months of record buying.

The Tokyo-based company has not sold any copper to China on the spot market this month, according to Bloomberg News, and only supplied volumes committed under term contracts.

"Excessive imports mean much of the purchased metal was just stored, raising the risk that [China] may sell it back to the market and depress prices," Koichi Kaku, general manager at Sumitomo's copper and precious metals sales department in Tokyo, told Bloomberg.