China Will Keep a Lid on Most Commodities

Looser credit conditions or fiscal stimulus may temporarily boost China's demand for coal, copper and iron ore, but the bounce would be fleeting

Daniel Rohr, CFA 1 April, 2015 | 11:37AM
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  • Mined commodity prices are unlikely to recover from recent lows, as China's structural economic transition diminishes the main source of global demand growth.
  • Falling input costs and global overcapacity have reshaped the global steel industry: Prices will be lower for longer
  • Weak crop prices and low farmer incomes are a significant headwind for fertiliser and seed companies, but we don't expect the breeze will be too strong

 

Prices for most industrial commodities (for example, coal, copper and iron ore) fell considerably last year and have largely continued their descent in 2015. Slowing Chinese demand has been the common denominator, reflecting a deceleration in construction and industrial production. We view this as a structural slowdown catalysed by overinvestment and rising debt. Although looser credit conditions or fiscal stimulus may succeed in boosting construction and industrial activity, this would likely provide only a temporary respite. 

China's structural shift diminishes the main demand growth engine for mined commodities globally. For commodities like copper and iron ore, China accounted for nearly 100% of demand growth over the past decade and now consumes roughly half of global output. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Anglo American PLC2,635.00 GBP0.00Rating
Antofagasta PLC1,384.50 GBP0.00
BHP Group PLC1,962.00 GBP0.00Rating
Glencore PLC352.00 GBP0.00Rating
Rio Tinto PLC4,542.50 GBP0.00Rating

About Author

Daniel Rohr, CFA  is a senior equity analyst at Morningstar.