China’s transformation from an export- to a consumer-driven economy will have a knock-on effect across a variety of industries in the country, and base metals are no exception.
The Hong Kong Exchange, which purchased the London Metal Exchange last June for HK$16.7 billion ($2.15 billion), held its first LME Week event in Asia this week at the Hong Kong Convention and Exhibition Centre, where producers, traders, consumers, analysts and members of global exchanges gathered to discuss shifting dynamics in the commodities market.
The export/consumer switch is real but will take time, notes Rick Holmes, director of Mitsui Bussan Commodities. “Good consuming economies rely on urbanised, well-paid people paid to consume,” Holmes told attendees. “But removing the factory and infrastructure industry and shifting to a consumer-driven economy will take time.” He forecasts it will take 30 years.
Despite a run on Chinese markets following a liquidity squeeze earlier this week, Holmes remains optimistic for base metals, notably copper. “I know it’s difficult to be bullish when everything’s falling but urbanisation and the growth of power supply will help copper demand,” Holmes said.
Jeremy Goldwyn, director of Sucden Financial, agreed that global markets are in for a volatile ride in the short term and agrees that China’s tightening of its bank-lending ratios will impact small businesses. But he argues that the general growth picture hasn’t changed, noting that power lines and construction will help the red metal.
Environmental issues in China was also a hot topic of discussion, with Jun Ma, Deutsche Bank managing director and chief economist for greater China, noting a “massive public awareness in the environmental space” as the government continues to introduce new initiatives to fight air pollution with a seemingly greater urgency than in recent years.
At present, 60% of China’s energy needs are met with coal, and 12% in clean energy. However Deutsche anticipates this number rising to 27% in the next eight years, and 40% by 2030, with the mainland’s preferred forms of alternative energy including natural gas, wind, solar and shale gas.
“The pace will continue to increase [towards clean energy], with natural gas the biggest contributor,” Ma says, noting that China will rely on Australian and Russian natural gas imports for a time until the country sorts out how to tap into its shale gas reserves.*
More natural gas usage in China means more construction for terminals and pipelines, which will help aluminium and steel sales, he adds.
The country’s rail system is another sector that should have tremendous investment in coming years as part of the country’s efforts to curb pollution by limiting traffic, and should boost speciality steel consumption, Ma says.
Daniel Smith, head of metals research at Standard Chartered, estimates that by 2020 China will overtake the US as the world’s biggest economy, and by 2030 it will be twice as big. And while the impact on energy and metals is difficult to measure, Smith notes that aluminium in particular will benefit as automakers continue to shift to the metal instead of steel in light-weighting efforts.
The power structures to support the new subway networks will also boost the copper story, Smith notes.
*For a in-depth look at how investors can capitalise on the US shale gas boom, see the forthcoming July edition of AsianInvestor magazine.