What Next for Commodities?

China’s economy consumes more steel per unit of gross domestic product than anywhere else, but the emerging market is slowing down spending

Mark Taylor 8 May, 2014 | 4:59PM
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The transition of China’s economy from a largely investment driven to consumption driven is underway. Production of steel in China in 2013 grew at a heady 9.3% to virtually match output from the rest of the world combined. China consumes almost half of the world’s steel. This is outsized relative to other commodities and additional strong growth from this high base will be challenging. Pushing the fixed-asset investment model further, risks future economic shocks. China’s economy consumes more steel per unit of gross domestic product than anywhere else.

In 2014, the rate of growth in steel production has slowed to 4.3% in the year to date. We view this as healthy and a sign of the ongoing shift in economic focus towards consumption and services. The building of iron ore stocks at China’s ports is an inevitable by-product of slowing demand growth.

At the same time we expect supply to do a better job satisfying the slowing demand of growth. In the near term, high and rising iron ore stockpiles scare the market, however, the most likely scenario is that the iron ore price will go through periods of volatility around a declining trend.

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About Author

Mark Taylor  is an equity analyst at Morningstar.