Managing an Industrial Economy in Transition
The torrid pace of growth in China during the last decade has driven the international market for industrial metals, with the Chinese market alone now accounting for 40% of total global copper consumption. At times, it seemed that China had an unlimited appetite for such commodities. However, ongoing slow growth in many of the markets for Chinese goods combined with new supply developments inspired by high prices have buoyed international metals supplies relative to demand.
At the same time, new leadership within the Chinese Communist Party is attempting to manage some of the consequences of many years of broad economic growth. While the government attempts to manage the economic changes, China’s growth has decelerated. Aggressive cooling measures in the Chinese property market may depress industrial metal demand from the construction industry. The outlook for industrial metals remains uncertain as the Chinese government continues to restructure the economy while trying to both maintain growth and cope with hot money created by central bank easing in certain developed nations.
China’s new leaders have made it clear they expect more moderate economic growth as their policies gradually take effect. The government’s ability to manage a smooth transition and maintain targeted growth rates in excess of 7% will determine the outlook for industrial metals in the short to medium term.
Government Policy Impacts on Commodity Markets
Industrial metals prices, as well as those of broader commodity markets, are likely to continue to be driven by demand in China. The outcome of government policy changes will set the tone for these markets going forward. An analysis of multiple ongoing policy initiative leads to the following short-to-medium-term scenarios for commodity markets.
1. China Hot Money Crackdown
Estimations of invoice inflation posit that China’s Q1 2013 trade surplus was far lower than officially reported. The Chinese government has announced a series of measures designed to combat so-called ‘hot money inflows’ and bring greater transparency and reliability to import data. The crackdown may help ease some of the speculative pressure driving the Yuan higher and skewing credit conditions, but it also may reveal the extent to which exporters are over-reporting prices and shipments as the global economy continues to struggle.
A decline in in the real net exports data combined with sluggish domestic consumption threatens to slow the growth of aggregate demand in the face of China’s already slowing growth rate. These further headwinds drag down industrial sentiment and demand, pushing down industrial metals prices in the face of potential oversupply issues.
2. Structural Change in China
The Chinese government continues to manage the transition from an investment intensive, cheap labor fueled growth model to one powered by more value-added service activities and mass consumption. This economic change and the accompanying move from low to middle-income status also threaten to temper the rapid pace of economic growth seen in the recent past.
As China gradually shifts towards consumption and services, the previously torrid demand growth for industrial metals may slacken, exerting downward pressure on prices when some producers may have hoarded inventories and increased capacities based on unsustainable growth projections. A slowdown in demand and domestic prices quickly spills over to impact the markets supplying China’s commodity needs as well.
3. Manufacturing Rebound
After months of disappointing numbers and dour news, government industrial policies spark a series of surprises in Chinese industrial numbers that in turn lead to a rebound in manufacturing activity. Positive economic growth in the United States and other markets for Chinese manufactured goods helps reinvigorate the slowing industrial sector.
This unexpected turnaround in manufacturing in China proves a very positive market surprise. Industrial firms require greater volumes of base metal and other industrial commodities than originally expected, exerting upward price pressure on copper and other industrial metals.
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HedgeSPA Research Team – 3 June, 2013