TORONTO (CP) -- Investors in the metals sector shouldn't expect big changes to the overall market following last week's earthquake in China, as the need for materials to rebuild the ravaged areas should keep the sector strong despite any short-term problems.
The earthquake, which claimed tens of thousands of lives and left millions homeless, also led to losses in Chinese metal production. But most observers say any spillover into global markets will be small.
"China is enormously resilient now relative to 10 years ago, and absolutely resilient compared to 25 years ago," said Jennings Capital analyst Ron Coll.
"These guys now have the ability, have the financing clout to do it as quickly as anybody on the planet."
The earthquake's impact on metal markets, he said "might be a short-term speed bump, if you will, but long term it may even be more positive because they'll have to replace what's damaged in terms of capital infrastructure, and then continue with the growth, because China's growth continues at nine, 10%, 11% per year."
TD economist Dina Cover said the biggest supply impact was on zinc, since the three provinces affected by the earthquake have about 900,000 tonnes of production per year, or 10% to 11% of the country's capacity, and 500,000 of those tonnes were in the hardest-hit area.
One or two zinc smelters have been shut down due to damage, and about 34,000 tonnes were lost to power outages.
The area also produce aluminum, Cover said, noting that one small smelter, with 120,000 tonnes per year, was hit.
"On the zinc side, there is going to be a loss of production, but the market will still be in oversupply. They're saying that these smelters will come back online in a couple of months; they won't be out for a long period of time," Covers said, noting that smaller-than-expected oversupply should support prices in the short term.
"On the demand side, the reconstruction that will have to happen to repair all the damage by the earthquake will have a small increase on demand on aluminum, and maybe copper."
John Redstone and John Hughes of Desjardins Securities pointed out that Sichuan is a major producer of hydroelectric power, and according to reports, "at least 8.74 gigawatts of capacity (1.2% of the national total) has been damaged, along with 22 coal mines."
"Any long-term problems at the generating plants could affect metal-producing operations outside the province," Hughes and Redstone wrote in a report.
"Although we have not yet adjusted our metal market forecasts, we believe significant metal production losses could result from the earthquake and we will be watching developments closely."
The size of the global economy makes it difficult to pinpoint any Canadian company that will be affected by supply or demand changes stemming from the earthquake, Coll said, observing that China is just one of the buyers Canada supplies.
Investors, Coll said, should trust that the overall market for metals will remain strong.
"The metals markets have been a little bit weaker lately, but if (the earthquake) is the cause I'd be surprised," he said.
"Both the supply and the demand side still remain pretty strong - demand is wonderful and supply is still limited in terms of new mine production of all of these commodities. Obviously there'll be little shocks and rumours, but I don't see anything massive."
(c) The Canadian Press 2008