Commodities | Aug 06 2008
By Chris Shaw
The lead up to the Olympics this week in Beijing has seen a time of immense activity levels in the Chinese capital as facilities and infrastructure had to be built. But the scale of activity left some market participants worried about the potential for a post-Games economic hangover.
Barclays Capital argues a significant slowdown in activity levels would be unlikely in coming months, saying there is scope for stronger demand growth in some sectors of the economy late in the September quarter and into the end of the year.
In part, this view reflects the shift in the driver of the Chinese economy from exports to domestic demand. This has been seen over recent months as a result of government policy aimed at generating strong income growth and an improved distribution of income throughout the economy. Such policies have produced ongoing expansions in industrial production, retail sales and fixed asset investment.
To fully understand the trend in commodities demand, the group suggests it is also necessary to take a more microeconomic view as each market has different characteristics and fundamentals at present. As an example, Barclays suggests the pre-Olympic shutdown of a number of industries related to the metals market implies a post-Games ramp-up of output as operations get back to normal.
As well, de-stocking in the copper and aluminium markets simply cannot continue forever. This leads the group to expect some spot market buying in coming months as activity levels return to pre-Games levels and stockpiles are at least partially restored to previous levels.
In the oil market, policies in recent times have essentially been focused on ensuring sufficient supply during the Games. Still, there are no signs supply has risen to substantially above likely demand. This makes it unlikely there will be any stock overhang once the Games are completed, especially given car owners will be free to return to the roads without the current restrictions.
The other positive point for commodities the group makes, is that even without the Olympics, Beijing accounts for only 2% of China’s GDP growth. This means there are still a huge number of large scale infrastructure and development projects being undertaken throughout the rest of the country. This suggests demand for commodities will remain high, particularly in Shanghai, where Expo 2010 is to be held. This activity should ensure solid post-Olympic commodity demand, in the group’s view.