Could China once again drive a commodity price rally in 2012?
While China’s investment-led stimulus splurge drove industrial commodity prices to near record highs in 2010 and early 2011, signs of slowing Chinese construction and investment activity had a significant dampening effect on metals prices during the final quarter of 2011. Copper prices were particularly affected, with LME copper prices falling by around 25% during the final quarter of 2011.
And GDP figures released tomorrow are expected to show that China’s y-o-y GDP growth dropped below 9% during the final quarter of 2011, data likely to lend further weight to slowdown fears, albeit from a high base. But while talk is increasingly of the possibility of a Chinese hard landing - a scenario that would have a significant negative impact on commodity demand and prices - Goldman has a much more bullish outlook for both China and industrial commodities.
In its latest metals outlook, the investment bank predicts that policy easing in China will lend support to metals from current levels on both a six- and a 12-month view, forecasting a 5-10% increase in Chinese end-use metals demand in 2012.
In particular, the report points to Chinese bank lending numbers released last week showing above-expectation credit growth in December as a sign that Chinese policymakers are set to adopt a much more accommodative stance for commodity prices in the coming months. Furthermore, it believes that Beijing’s continued focus on affordable housing construction as well as hints that further consumer subsidies may be in the offing will support Chinese commodity demand.
According to Goldman metals analysts Max Layton and Allison Nathan:
| “The key to the metals markets going forward will be closing the “gap” between the weakness today versus the demand strength expected to be created by both the monetary and fiscal stimulus that is likely to occur in 2012 with the now observed reduction in Chinese inflationary pressures.
In December we have already seen significant evidence of substantial loan growth helping to stimulate domestic demand. More specifically, we believe that some of the fiscal support will be targeted at metals-intensive industries in 2012, including construction (social housing), consumer appliance, and automotive industries.” |
Goldman is particularly bullish on copper, predicting a “12% upside for copper on a six-month horizon and reiterat[ing] our long copper trade recommendation”. The US investment bank also maintains its long zinc recommendation, predicting a 10% expected upside on a 12-month basis. It forecasts year-end copper prices of $8,567/ton, up from $7,991 on January 13; $2,321 for aluminium (up from $2,114) and $2,104 for zinc (up from $1,954).
Nevertheless, despite this apparently sunny outlook, Goldman has in fact revised down significantly its previous annual price forecasts for 2012, which were released in October 2011, before the sharp fourth-quarter declines, which it failed to predict.
Its 2012 price forecasts also remain higher than consensus. Bank of America-Merrill Lynch projects year-end copper prices at $7,750/ton; aluminium at $2,275 and zinc at $2,075, for example. Its 2012 GDP forecasts for China – 8.6% - is also very much at the higher end of analyst expectations – many other projections plot GDP growth as being much closer to the 8% mark this year.
Is Goldman underestimating the risks to the downside, particularly on China? Or will metals prices lend some much-needed new year cheer amid the general gloom in 2012, driven by continued robust demand from China? Expect plenty more ink to be spilt on the subject in the coming months.
Further reading:
China slowdown fears hit commodities prices - FT (subscription required)
European hedge funds line up bets on China downturn - Reuters
CHINA: Degrees of freedom