- China’s shift from a construction boom to consumption-based growth means key changes are playing out in commodity markets.
- Chinese LNG demand has risen by 50% in the first half of 2018, while it phases out inefficient coal and steel producers.
- Despite the shift, HSBC expects global commodity prices to hold up over the medium term.
China’s commodity needs are changing as it continues to modernise, and the ongoing shift will be the catalyst for a large-scale re-positioning in commodity markets.
Instead of infrastructure and construction-based growth, HSBC chief economist Paul Bloxham said the new paradigm will see a transition towards energy and agricultural products. And the shift will take place within the context of an increased focus on the environment.
“Ongoing urbanisation – China’s current urbanisation rate is 56%, compared with a US rate of 82% – should mean continued strong growth in demand for energy.”
And China’s environmental policy agenda means it will try and meet that demand, while simultaneously shifting away from coal as its primary energy source.
“Taking the long view, forecasts from the US Energy Information Administration suggest that coal is expected to fall from its current 63% of China’s energy mix to 36% by 2050, while renewables rise from 12% to 21% and gas from 6% to 16% of the energy mix,” Bloxham said.
In the near-term, it’s all about natural gas. Bloxham said that in the first half of 2018, China’ LNG imports have risen by 50%:
Chinese LNG demand has helped to ease concerns about a global supply glut and lifted LNG spot prices.
And importantly for Australian lithium producers, Chinese authorities are also targeting two million electric-vehicle sales by 2020, increasing to seven million by 2025.
On the agricultural side, Bloxham said a lot of Chinese demand for core food products can be sourced domestically, given that it’s already the world’s largest producer of rice and wheat.
However “rising middle class incomes in China is also driving increased demand for the ‘finer foods’, including meat, dairy, and seafood”, Bloxham said.
Citing patterns from other countries’ development, Bloxham said such demand is likely to grow further. In view of that, it’s not surprising that Gina Rinehart is positioning to become a major beef exporter to China from northern Australia.
The increased demand for energy and food will be partially offset by a slowdown in China’s huge appetite for base metals.
This chart illustrates China’s out-sized demand for commodities during its construction-based growth phase:
More than 50% of global demand for thermal coal, iron ore, aluminium and copper — all from one country.
However, “growth in China’s infrastructure investment has slowed to its weakest pace since 2012 and growth in residential construction has also cooled,” Bloxham said.
In addition, Chinese policymakers are also grappling with the problem of excess capacity.
While China’s commodity-demand is well known, “what is less well appreciated is that China is also a large producer of many commodities”, Bloxham said.
However, a renewed focus on the environment means many less efficient, high-pollutant coal and steel refineries have been closed down. For now, that’s good for companies who export higher grade commodities (such as Australia).
So over the medium term, reduced Chinese demand has also been met by tighter supply due to environmental restrictions.
“HSBC’s metals team sees the prices of most metals as past their peak prices, but holding up well over coming years,” Bloxham said.
Here’s a summary of HSBC’s commodity price forecasts:
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.