The Yunnam government was reported as proposing large inventory purchases of base metals for a year to support domestic industry - we doubt the validity of this as reported.

We are seeing the price rally of steel prices and bulk commodities (cola/iron ore) from their lows in recent weeks.

The reasons behind this include:Months of production cut have tightened supply, causing a shortage in some product specifications.

The previously oversold market has now seen some restocking. In September and October, the apparent consumption of Chinese steel dipped into negative 16% YoY growth, reflecting a large scale of de-stocking by steel traders and end-users.

The first signs of extra demand from infrastructure and other government supported projects are emerging. Moreover, as the People's Bank of China has continuously cut interest rates and encouraged more lending, it is said that some marginal demand has been released due to the improved credit conditions.

This week, Macquarie attended the 2008 China Aluminium Forum held by Antaike in Sanya, Hainan Province. The key highlights from the conference were:

Total aluminium production cuts in China are around 2.0mtpa. However, production cut announcements have slowed in recent weeks due to major falls in aluminium raw material costs.

Alumina refineries using imported bauxite might restart production soon following recent steep falls in imported bauxite prices and a collapsing freight rate market.

Exports policy adjustment is expected in the aluminium industry in 2009 but anti-dumping will be a major risk.

The demand outlook remains sluggish in both domestic and export markets. Payment default risk has become a major problem.