Commodities | Apr 28 2009
By Chris Shaw
Westpac has looked more closely at the latest Chinese economic data, attempting to analyse annual growth rates to determine just how much of a seasonal impact there is to the numbers coming out of the country and what this might mean for commodity prices.
Its findings suggest while March quarter data revealed a slight flattening in the moderation of annual growth rates for the Chinese economy the numbers don’t provide a clear picture of what Westpac views as an improving underlying trend.
The bank’s revised numbers suggest while the global financial crisis has impacted on the Chinese economy, the signs points to a solid rebound in activity levels so far in 2009. Even adjusting for the impact of the Chinese New Year, the data indicate demand for some commodities has improved.
For instance, iron ore imports have surged to record highs this year and copper imports have bounced off their lows of last year, though the impact is not being felt across all commodities as the bank notes petroleum imports have continued to drift lower compared to the numbers in recent years.
The magnitude of some of the gains has been substantial. The bank notes copper prices are up more than 40% from their December lows as, in the eyes of some industry analysts, Chinese buyers are restoring inventories while the metal is perceived to be cheap.
This has flowed through to stronger Chinese growth numbers as the bank’s analysis shows, after peaking in early 2007, Chinese growth declined steadily until the December quarter last year. Since then the pick up in activity in the copper market has coincided with economic growth in China improving from a seasonally adjusted annual rate of about 2.5% to closer to 6.0%, forcing some economists to lift what had been overly pessimistic estimates.
The question then becomes can this improved growth rate be sustained? Here the bank is cautiously optimistic, suggesting the fact China has been able to maintain positive through the year industrial production growth is a particular positive, especially given in March the country’s PMI (Purchasing Manufacturer’s Index) returned to expansionary levels.
This improvement in economic activity implies a base has formed for commodity prices but the mixed nature of the economic and commodity related data out of China means any recovery is unlikely to be a strong one, the bank offering evidence of this in recent declines in iron ore prices and the continued weakness in petroleum import levels.
Copper market activity as well supports the bank’s view any recovery will be gradual as despite the pick-up in recent months, Chinese imports of the metal are still well below the peak of 1H08, meaning it will require a pick-up in global demand for the copper price to sustain its current momentum.
This leads the bank to conclude a sustained recovery in commodity prices won’t occur prior to growth in the OECD nations recovering, which it expects in 2010, simply because, while the Chinese economy is improving, the dismal outlook for global growth outlook as a whole will hold back metal price performance.