UBS has been on the ground in China, and thinks concerns about weak commodity demand are overblown

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  • Many industrial and bulk commodity prices have been under pressure, driven lower by trade disputes and demand concerns involving China.
  • After recent meetings with industry contacts, UBS researchers believe concerns about Chinese commodity demand have been overblown.
  • It says recent falls in mining stocks offer value for investors.

Prices for many industrial and bulk commodities have been under pressure recently, undermined by the prospect of a potential trade war erupting between the United States and China along with renewed concerns over a slowdown in China’s construction sector.

The latter, in particular, has dominated sentiment across iron ore, coking coal and steel markets with building inventories and weak demand fanning fears over just how far prices may fall.

While few know how increased trade frictions between the United States and China may play out, researchers at UBS have some news that will undoubtedly please commodity bulls.

Following a recent trip to Beijing, Shanghai and the industrial centre of Tangshan in China’s north, UBS is now confident that recent weakness was driven by temporary factors, rather than a structural shift in demand from the nation’s construction sector.

“We learned that demand had been held back through these months, reflecting a later spring festival than usual, where many firms and individuals took two weeks off instead of the usual one week,” UBS says.

“The National People’s Congress in the first two weeks of March saw activity halted in and around Beijing to deliver cleaner air and clearer roads, [while] winter cuts impacted demand side, in terms of less construction activity, more than many people expected.”

Based on meetings held with industry contracts, UBS says these factors all acted to temporarily reduce demand, something that is now expected to reverse in the months ahead.

“These factors were seen to unwind at the end of March and into the June quarter, releasing pent-up demand into the normally seasonally strong second quarter,” the bank says.

“Contacts exposed to construction volumes reported order books and expected build in 2018 in line with or higher than activity recorded in 2017.

“This bodes well for demand impulse through the June quarter.”

As such, UBS says there’s now an opportunity for investors to scoop up mining stocks at lower levels.

“Recent volatility provides opportunity to engage a sector which is benefiting from robust global growth, supply discipline and modest reflation at lower valuations,” it says.

As for the risks, the bank says inventory levels in China should be “watched closely during the next few weeks to gauge whether pent up demand will draw down larger than usual stockpiles as output returns post winter cuts”.

It adds that signals from Chinese property and infrastructure investment, along with credit growth and policy toward the property sector, “will also bear close monitoring”.

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