Nothing commands both euphoria and fear of commodities investors more than China.
After all, the nation’s surging rate of urbanization and population growth has made it the No. 1 consumer across a variety of natural resources. Much of the bullish commodity thesis stems from the notion that the Asian Dragon will continue to crave more and more resources to fuel its growth. So far, that has held true as demand has increased year-over-year.
But what happens if China slows? Given the global headwinds coming out of developed Europe, analysts expect that to happen. The nation’s economy is expected to post a fifth successive quarter of slowing growth, and many anticipate that growth will drop to 8% during the first quarter. This is down from 8.9% growth in the previous quarter.
Chinese Premier Wen Jiabao recently cut the nation’s economic growth goal to 7.5% for 2012, down from 8% over the past seven years. While that’s still an impressive rate, even that slight reduction in growth could undermine the commodities complex. For natural resource investors, keeping an eye toward China would be prudent.
First Cracks Forming
From copper to corn, wheat to coal, China is the No. 1 driver of many markets. So it’s not surprising that any dip in its demand will hurt commodities prices. After enacting a massive stimulus plan to combat the global economic slowdown, China has been faced with its own problem of high inflation. The resulting monetary and fiscal policies might finally have begun to work and cool the Asian Dragon’s economy. The nation’s GDP growth rates have dwindled over the last year or so, and more recently, HSBC’s (NYSE:HBC) measure of Chinese factory activity fell for a fifth straight month this March.
This lowered production and economic growth might finally be reaching the commodity producers. China’s sprawling infrastructure initiatives have greatly benefited those firms in the iron ore and steel industry. However, speaking at the Global Iron Ore & Steel Forecast Conference in Perth, Australian mega-miners BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO) echoed similar statements on China’s iron demand. Both see slowing demand ahead.
Ian Ashby, president of BHP’s iron ore division, said, “The (Chinese) economy is shifting, it’s changing. Steel growth rates will flatten and they have flattened,” according to Reuters.
Similarly, Rio estimates that China will see single-digit iron ore growth throughout the year. Currently, the nation consumes more than half the world’s iron ore production, and the news has sent prices downward. BHP predicts ore prices will average around $120 per ton. That’s significantly lower than current spot rates for the economic building block.
China’s demand for other key commodities also is beginning to wane. After a huge late-year surge in gold imports, the nation saw sharp declines in both December and January — despite the fact that this period included the Chinese New Year, a historically bullish holiday season for consumers to buy gold.