Will China be more of a positive than a negative for commodities this year?

Jan 22, 2014 08:00 GMT   Source:Scrap Register

Tags: Barclays

CHINA January 21 2014 11:46 PM

BEIJING (Scrap Register): It is a long time since China was a positive for commodities markets. For most of the last few years China has blown headwinds at commodities, including concerns about a hard landing, the impact on its metals intensive manufacturing sector of rising costs and soft export markets and the need for structural reform to reduce the economy’s overdependence on investment and infrastructure building, said Barclays in a research note.
 
The difference this year is that hard landing risks have faded and market participants have lowered their expectations for the pace of Chinese economic expansion. The prospect of sub-8% growth is not nearly as scary as it used to be and anything above 7.5% will probably rank as an upside surprise this year.
 
Meanwhile the signs are that consumption of key commodities in China remains strong. The majority of base metals saw their demand growth rates slow in 2013, but they continued to exceed that of the broader economy. Oil demand growth showed some modest signs of slowing. At around 360kbpd, 2013’s expansion was less than 2012’s 400kbpd run rate, but a big improvement on 2011’s 270kpb.
 
On top of that China’s commodity imports appear to have held up robustly into year-end. Preliminary trade data released late last week showed China’s commodity imports ended 2013 strongly, with a broad-based expansion in energy and metal imports in December. Year-end restocking, as well as financing-driven imports, fuelled the strength, though full-year growth was muted.
 
Finally the China state grid has announced a 13% increase in its planned spending for this year taking the total to an all-time high of just over Y430bn. With GDP growth expected to expand this year but the transition to a more consumption-led growth to intensify, it appears that there are still some sectors of the “old economy” that are performing robustly enough to provide a sizeable boost to local metals demand.

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