To countenance the idea that any form of economic slowdown in China could lead to an extended period of depressed commodity prices is misguided. Admittedly, commodity prices over the least three years have been poor. But in the view of Jeremy Baker (pictured), Head of Commodities at Harcourt, the events of 08 and ’09, which led to a structural bear market were more of an “interruption” to the commodity supercycle than anything longterm.
Simply put, the case for investing in commodities remains high says Baker, particularly when placing China at the centre of the argument; something that Baker has written about in detail in a research paper entitled China and commodities – the next stage.
“China was driven by an export-model to the rest of the world. When that model collapsed because of the financial crisis they had to compensate through fixed asset investment into infrastructure and has created the issues we see today. If you consider where China was, where it is today and where it’s going, then I still think there’s significant upside to various commodities – not all. This will relate to ongoing infrastructure development and China’s consumer market as, which I think continues to be underestimated by many external observers.
“The consumer model is going to drive China’s economy going forward as living standards and per capita income levels rise,” says Baker.
That expansion on a long-term basis should provide impetus for consumer demand-related commodities such as grains, meat, and certain industrial metals like copper for high-end infrastructure as well as energy: all have significant growth potential.
It is estimated that China’s urban population will reach a staggering one billion within 15 years. As its economy shifts from the external export-driven model to an inward domestic-driven model, demand for commodities will remain significant.
“The reason I focus on China is because of the combination of industrialisation and manufacturing and the increasing expansion of per capita income,” states Baker.
If one were to extrapolate data based on Japan and Korea’s economic growth and apply it to China it suggests there is plenty of room for industrial metal consumption. Copper for example, is around 6.21kg per capita consumption. In Korea it is 18kg.
“Does China go from a model where it is consuming 50% of copper production to 70%? Probably not, but it could go from 50% to 60% consumption. There is that potential for it to increase and I think that’s something that still gets misconstrued.
“People have been focusing on production supply growth in 2014, 2015, suggesting that copper prices should be lower but things are more opaque. I think there are significant supply constraints in copper, zinc (because of the lack of infrastructure development), lead and nickel to some degree.
“If you look at steel, whose core component is iron ore, then no I don’t see a supply issue there. I would say steel is a long-term sell, aluminium also a long-term sell. However, things like copper are still interesting,” opines Baker.
As the Wall Street Journal reported, copper prices in February rose to their highest level in three weeks ($3.286/lb) on the back of encouraging Chinese economic data.
“There is a strong trend for increasing commodity consumption going forward. However, it will be more directed at commodities where there are real inefficiencies in the market: copper, platinum and palladium and to a lesser extent lead and zinc,” concludes Baker.