Macro Focus – China’s commodity demand

by: Maritza Cabezas

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China influential force in commodity markets. As the fastest-growing economy in the past decade, with a growth strategy that relies on investments and exports, China has displayed an intensive use of commodities compared to other emerging nations. China’s consumption as a percentage of global production accounts for about 20% of non-renewable energy resources, 23% of major agricultural products and 40% of base metals. Meanwhile, there are new trends in the outlook which will influence the future of China’s commodity demand. These include its rebalancing strategy towards consumption instead of investment, the “new” urbanisation drive and innovations to develop renewable energy.

No abrupt adjustment in commodity demand in the coming two years . During the next two years, in the transition towards a new growth strategy, which implies lower GDP growth rates compared to the past decade, we don’t expect any abrupt adjustment in China’s demand for commodities. Indeed, authorities are committed to maintaining high GDP growth targets of around 7% during the 12th Five-Year Plan. This implies that during this period, investment in real estate and infrastructure will be critical to avoid an abrupt slowdown. We also expect stronger demand for commodities related to solar and wind energy, since this is the new wave in environmental friendly energy sources. Meanwhile, the demand for soft commodities is undergoing a slow transformation. Only “new” food items, such as coffee, will most likely continue to experience a surge in demand as consumption patterns change.

• Winners and losers in the coming decade. There will be winners and losers in this transformation process. Commodities linked to rising income and changing consumption patterns will fare better than those used for construction and infrastructure growth. The demand for consumer goods coming from the growing middle income bracket and from migrant workers will have a large impact on demand for household appliances, vehicles and food. Meanwhile construction and infrastructure investment growth will slow but only gradually, given the “new” urbanisation drive that is still to come. This could imply that steel demand, for instance, which is widely used across industries, will expand, but at slower rates as China moves further in its development.