Not all commodities will lose out should China succeed in changing its growth model from one based on resources-intensive infrastructure investment towards one supported by higher levels of domestic consumption, new research by Barclays indicates.
China’s twelfth five-year plan, endorsed in March, prioritises economic rebalancing and the current poor commodity market sentiment is often attributed to this transition, owing to the fact that the giant Asian economy is the biggest consumer of many of the world's commodities.
However, Barclays commodities research MD Kevin Norrish says usage intensity of several commodities, including gasoline, nickel and aluminium, could grow robustly as a result of China’s proposed transition. By contrast, silver, platinum and several agricultural commodities are vulnerable, while the usage-intensity downside for commodities such as coal, steel, copper and zinc is expected to be relatively modest.
It is also not immediately apparent whether China’s transition will follow a smooth trajectory, with potential still existing for the country to revert to infrastructure spending should growth and job creation come under serious pressure.
In late May, the International Monetary Fund lowered its forecasts for China’s growth to 7.75% for 2013, having previously forecast growth of 8% this year and 8.2% for 2014. The country has also significantly reduced its commodity imports during 2013.
Therefore, Norrish believes that the prevailing weak sentiment is probably driven more by cyclical factors than the structural issues being cited, including China’s economic shift and perceptions that the supply-side risks have dissipated.
“In my opinion, many in the commodities business are confusing the cyclical and the structural,” he says, noting that commodities have performed poorly historically when growth and interest rates are low.
A new commodities outlook statement by the bank argues that it is seeing signs of a “return of fundamentals” and a breaking free from established ties with other asset classes. There has already been a decoupling of commodity prices from the 2011 and 2012 trend of tracking European debt spreads.
It expects there will also be material divergence in the price performance of individual commodities over the short and medium term.
A modest and differentiated recovery is being forecast for 2013, while Norrish and his team believe commodities are on the “brink of a great rotation in price performance”.
“Gold and silver, frontrunners since 2009, are likely to be among the weakest of the commodities we forecast. Copper may slip, as laggards of the past few years like zinc and tin challenge for the crown,” the bank says. It is also bullish on the medium-term outlook for West Texas Intermediate oil and US natural gas prices for the period to 2015.