Commodities | Oct 11 2012
By Andrew Nelson
Like it or not, there has been a bit of an improvement in market sentiment over the last month or so on the back of some central bank policy announcements from around the globe. Commodity prices have been a distinct beneficiary as risk appetite slowly improves. But let’s not forget something really important: China.
Despite the recent improvement in sentiment, the global growth outlook remains soft at best, which puts good odds on the recent run probably being a relatively short-lived affair. Add to that the prospect of even weaker demand given the slowing economic progress being made by China and it’s hard to see just how bulk commodities prices will get back to previous highs any time soon.
It seems just a few months back few were worried about the signs of slowing in the Chinese economy, having faith the government would step in, as it usually does, and start stimulating. Six months down the track and China is still heading south despite Beijing’s attempts to turn the ship around. Thus, the uncertain outlook for the Chinese economy is becoming increasingly uncertain, with manufacturing activity especially continuing to not only disappoint, but cause concern.
Analysts from National Australia Bank believe the recent investment stimulus announcements are probably suggesting authorities are determined to stave off a hard-landing via any means necessary. However, NAB is growing increasingly sceptical about the near-term impact these moves by the Chinese government may have. The folks from NAB reckon more policy easing is needed soon if China is going to keep its growth rate above the government’s target of 7.5% for the year.
Sure, the US economy is still expected to strengthen in 2013, but most agree it will happen at a much slower pace than previously hoped for. And while recent actions taken in Europe have calmed markets for the time being, there are still a myriad of issues to work through. All of this uncertainty will probably keep a lid on commodities prices, thinks the bank, with markets likely to be soft for the foreseeable future.
Analysts from Commonwealth Bank have also joined the party, downgrading their 2012 GDP growth forecast for China by 0.2% to 7.8% and cutting 2013 GDP growth by 0.5% to 8% given the delayed recovery in the developed world. The bank argues it’s not just a "China can fix it by itself" problem anymore, with the Middle Kingdom now firmly caught up in the same economic mess as the rest of us.
CBA blames developed economy capex spending, pure and simple, as the culprit and says China won’t pick up until capex does. And that won’t happen until the level of global uncertainty begins to improve.
To give you an idea as to the timing of a recovery, CBA has pushed out its expectation for acceleration in growth momentum by two quarters to Q213 given the persistently weak levels of offshore demand. The recent run of policy easing and infrastructure spending won’t be enough until demand from North America and Europe begin to pick up. CommBank is expecting flat quarter on quarter (as opposed to year on year) GDP growth for China of around 1.9% over the next few quarters, with hopefully 2% exceeded some time in 2H13.
In the meantime, CBA has lowered its price forecasts for iron ore, coking coal and zircon to reflect a trip to China in late September and the downward revisions to their GDP growth forecasts. The bank now expects Chinese steel output to end flat in 2012 and then to grow by 4% in 2013. These numbers are about 1%-2% lower than previous estimates.
As a result, CommBank trims its FY13-15 iron ore prices by 4%, 11% and 9% to US$117/t, US$119/t and US$115/t respectively. The bank’s FY13-15 coking coal forecasts have been cut by 7%, 16% and 3% to US$180/t, US$170/t and US$192/t.
CBA, does however, see chances of something a little better, noting iron ore stocks at mills are now around two week’s worth, which is pretty tight by historical and operational standards. If we are lucky enough to see even a modest-sized re-stock in the coming quarters, iron ore prices could push back above the US$120/t mark. The bank notes there is also a chance that capital inflows to China could pick up thanks to QE3 and this would also support inventory restocking, although this is more speculative than fundamental, admits CBA.
The bank has also tempered its outlook for zircon, noting an increased amount of thrifting and substituting by Chinese ceramic manufacturers. CBA has trimmed its zircon demand growth estimates by 2% in 2013 to 7% to account for the cost cutting.
A different perspective is offered by economists at Citi, who have sat down with some 60 equity investors in the US over the past few weeks to talk about China. Unsurprisingly, the broker notes investors there are as cautious there as everywhere else when it comes to the economic slowdown in China and the difficulty in deciphering government policy.
Citi notes only about a quarter of the people it spoke with were even interested in talking about turning points, or indicated they might consider making some early moves into Chinese equities, maybe.
With policy sluggish and less than transparent, GDP concerns top the list of issues that share market investors have. The broker notes that many believe the fate of the Chinese economy is beyond the control of Beijing for the moment, while others believe that even if the government does get a handle on things and turns the ship by 4Q, the upside will still be disappointing.
It might not be very helpful, but wait and see is the current word on China.
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