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Wednesday, February 24, 2016 3:04 AM ET
China's economic transition not a 'death knell' for commodities
By Angie East
ANZ senior commodity strategist Daniel Hynes believes investors are "overstating" the risks around a slowing Chinese economy, saying that the Asian
nation is still heavily reliant on commodities despite its transition to a more services-based economic model.
"Certainly from our perspective, the issues around China and its changing dynamics within its economy has been a major impetus to the weakness that
we've seen in commodity markets," he told delegates Feb. 24 at the RIU Explorers Conference in Fremantle, Western Australia.
"Obviously leading up to recent years, we saw an explosion of investment into the economy and that resulted in huge growth rates in commodity markets,
but now that is changing.
"It is moving from obviously that more manufacturing- [or] industrial-based economic model to a more services-based one and that's where the markets have
been grappling with that change over the past year or two."
Hynes said there are still some positive scenarios for commodities, particularly industrial metals, and China and its changing economic model "won't be a
death knell for commodity markets."
While steel consumption has peaked at around 600 kilograms to 800 kilograms per capita and is starting to decline, China's consumption of other metals is still
expected to grow.
"Certainly in some markets we will see a much better or continued sort of growth in per capita outlays, but in terms of steel, which tends to be obviously the
first commodity that's really consumed in huge volumes in a growing economy, it looks like we're going to start to see that peter out," Hynes said.
Over the past few years, base metals such as nickel, copper and aluminum have come under increasing pressure due to rising inventories. However, there
is evidence now those stocks are reducing.
"Nickel has been the standout performer in terms of inventory, where it's driven to sort of record highs in terms of days of supply, but outside of that you
are starting to see signs that things are starting to move back to more normalized levels," Hynes said.
"Certainly in aluminum and zinc, we see those inventories starting to fall both on an absolute basis, but also on a day's consumption. When you look at other
ones like the two major ones, particularly copper, it's never reached sort of excessive heights.
"So these fears of weakening demand I suppose have to be put into perspective with the inventory situation in the base metals, which we don't think is as
bad as price action would suggest."
Although the years of "explosive" growth, a period that was dubbed the "supercycle," are behind the industry, the good news for miners is that China still
has a very high reliance on certain key commodities, which is expected to lend support to prices.
"China has always had a very high level of dependence on copper and that's stayed around that 80% to 85% mark essentially of import dependence, but
you can see iron ore that's really accelerated or increased quite significantly over the past year or two, but then also some of the other base metals are still
sitting at that sort of 30% to 50% level," Hynes said.
"So while supply has been strong domestically in China in some cases, there is still a very high dependency on these commodity markets."
Hynes sees the market nearing the bottom very soon, with this year looking rosier for industrial metals.
"There certainly are signs that weakness will continue for the shorter term, but we're mindful that we're not too far away from that turning point," he said.
"We think the industrial metal markets in particular are a lot better placed going into [this year] than we feel in the energy and bulk commodity markets.
"We feel like we're nearly near the bottom of the commodity price cycle where we're sitting at the moment, and we're certainly hopeful that over the next 12
months or so we'll start to see some recovery in prices."
Source: S&P Global Market Intelligence | Page 1 of 1