China's appetite boosts global commodity outlook

The year ahead may yet prove to be a tough time for commodities, but the outlook from the 2012 Mining Indaba is cautiously optimistic, thanks to growth in demand from developing countries.

While economic conditions look “worryingly familiar” when compared to those during the global recession of 2008-2009, there are some distinct differences that suggest an improved outlook for 2012, according to the managing director of commodities research at Barclays Capital, Kevin Norrish.

Despite the risk from a recession in the eurozone, commodity-intense growth from developing countries, particularly China, is likely to sustain demand for both industrial and precious metals. Similarly, supply constraints could keep the prices of commodities elevated into 2012, he noted.

Gold could reach over $2 000 an ounce, platinum could reach $1 800 an ounce by the fourth quarter of 2012, while copper was likely to trade at over $9 000 a ton by the second half of the year, Norrish predicted.

“China is becoming more and more important, more and more quickly,” he said.

Rising demand
In 2010, China accounted for 50% of all demand growth across commodity markets. By last year this had risen to two thirds of demand growth.

This was tied to systemic changes in the demand structure in developing nations, including rising living standards and increasing urbanisation.

Meanwhile, consumer stock levels of many commodities were far lower than they had been in 2008-2009. Stocks of copper were at half the level they were at in 2008-2009, for instance.

On the supply side, apart from a handful of commodities, many of the production constraints seen in the 2008-2009 period remain.

Commodities such as nickel, copper and gold are likely to see improvements in production in 2012 with additional projects coming on stream, but supplies of other metals such as platinum, lead, zinc, silver, aluminium and palladium are likely to remain flat or decline.

Commodifying concerns
There are, however, a number of risks to this outlook, Norrish said, notably the concerns about the health of the Chinese economy and its ability to buoy demand for commodities.

The threat of a decline in Chinese exports to global markets overshadowed by the sovereign debt is of concern, he said. So too is the threat of a bubble in the Chinese property market.

Norrish argued, however, that there was evidence that the Chinese are beginning to increase domestic demand for the products the country produces, decreasing its reliance on exports to other nations. And the threat of a property bubble in the country had been “over dramatised” he said.

Chinese private property accounted for 12% of GDP, much smaller than the scale seen in countries such as the US, where a property bubble precipitated the global financial crisis.

The Chinese government, he said, has been working to “deflate” the problem slowly, and working to expand China’s social housing programme, ensuring continued demand for commodities.

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