Commodity traders in Asia believe that there could be huge distortions across a range of metals prices amid rumours that the Chinese Government is preparing an unprecedented multibillion-dollar buying spree to build reserves and rescue local smelters from oblivion.

As well as introducing short-term twists in metals trading, Beijing may be setting itself up for giant trading losses, dealers say.

The warnings by metals dealers come with aluminium prices already in chaos. It is viewed as one of the metals most heavily exposed to economic downturn and many believe that further price collapses could be imminent. Despite rumours of behind-the-scenes buying by the Government, the metal fell by its daily trading limit of 4 per cent on the Shanghai exchange yesterday, closing at a 15-year low amid fears of a global consumer and construction slowdown.

In China, the visible effects of a property price crisis and sweeping factory closures in the most heavily industrialised provinces have shattered market hopes that metal prices will recover soon.

In a move that spooked many investors, analysts at HSBC unveiled huge downward revisions to their aluminium price forecasts, pointing to the surprising rate of slowdown in China and the slow reactions of smelters in lowering production. The increasingly dire soundings from the car industry, where plunging sales and sharp production cuts have become daily fare, have also worsened the prospects for a revival in aluminium prices much before 2010.

Speculation of state-sponsored reserve-building by Beijing intensified yesterday after Wen Xiajun, a senior director at China’s state-run Nonferrous Metals Industry Association, said that the Government was considering “all base metals” as potential buying targets in its bid to stimulate domestic demand and prices. Mr Wen’s comments follow previous suggestions he has made that Beijing would restrict its metal-buying ambitions to aluminium.

The business environment has turned dire for many Chinese smelters. The plunge in aluminium prices – they are about 50 per cent down from their peak in the summer – has put the metal below the operating cost of about half the companies in the Chinese smelting industry, forcing what analysts at HSBC believe could become a substantial capitulation.

China has already begun to buy soya beans and other foodstuffs to help farmers and the metals industry has been calling for a similar strategy to be adopted in an effort to prevent smelters going into bankruptcy.

The provincial government in the aluminium smelting heartland of Yunnan in southwestern China said this week that it planned to buy as much as one million tonnes of ore and processed metal in an effort to prop up smelting operations in the region. Commodity traders in Hong Kong said that “unusual” price movements over recent days suggested that Beijing had already stepped into metals markets as a buyer.

Wensheng Peng, head of China research at Barclays Capital, said that the logic of any attempt by the Chinese authorities to buy up aluminium stocks was hard to fathom.

“Yes, some companies have built huge stocks of metal at high cost and are now in big trouble, but then the Government should just give them money rather than playing in markets,” he said. He agreed that any discussions of state aluminium purchases were hard evidence of rising panic among Chinese lawmakers.

Unsold inventory of aluminium and other metals has been piling up fast in China, with the surplus expected to rise to more than 1.2 million tonnes next year. Even greater than that may be the size of the “hidden” surplus in China, metal supplies that are not declared to the Shanghai exchange but wield a vast material impact on investors’ ability to calculate the balance between supply and demand.

China already plays a central role in dictating the prevailing price of aluminium. Seven years ago, China accounted for only 15 per cent of global demand, but that has risen to 34 per cent. By some calculations, 95 per cent of demand growth for aluminium is accounted for by China. Analysts at Deutsche Bank said that typical signs of a rebound in industrial metals would be rising equity markets, recovery in Asian export growth and a rise in the Baltic Dry shipping index – all “distant prospects”.

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