10 things to watch for in the commodities space

These 10 factors will have an impact on China and, as a consequence, on the rest of the world

Citi commodity research has come out with a report highlighting 10 areas that should be watched as they will have an impact on the world’s largest commodity consumer with 40 per cent market share. These factors could shape commodity prices and demand outlook in the coming months and years.

Environmental initiatives: Environmental pressures are in the spotlight as never before, particularly for coal and steel, where the strictest measures yet were implemented in 2013. There remains a lack of top-level direction, but mid-level officials have begun to push.

Overcapacity: The new government has made this a priority and we believe the first step has been taken to address overcapacity in the steel sector. Implementation remains crucial and 2014 may see initiatives spread to other industries.

Credit and debt: Credit is likely to remain tight as the government seeks to contain the “shadow banking” sector, while increasing scrutiny on local government debt threatens to slow infrastructure and real estate demand.

Financialization of commodities: Commodities in China are increasingly used to obtain financing and to invest in real estate. At the same time, financial products based on gold are growing rapidly and a number of new futures contracts are expected in 2014, including crude oil and HRC.

Real estate: Housing prices continue to rise rapidly, particularly in top-tier cities. We expect further cooling measures and a moderation in development activity over the course of 2014. Social housing has also passed its peak growth period.

Urbanization: One of the government’s top priorities and the largest driver of Chinese commodities demand. Land reform and residence permit (hukou) liberalization are key, with the former accelerating and the latter remaining limited. Whether incremental urbanization focuses on large city clusters or dispersed smaller cities also has large implications for commodity intensity.
 
Refining capacity expansion: Large-scale expansion of oil, copper, and aluminium refining capacity are turning China into an increasing exporter of petroleum products, copper cathode, and aluminium products.
 
Indonesia export ban: China’s nickel pig iron industry is set to be hit hard over the coming months. Chinese firms will also need to source additional bauxite and alumina, and the ban may slow the rapid expansion of aluminium smelting capacity.

 
Trade flows: China is increasingly importing raw materials and exporting refined commodities, though this runs counter to environmental goals. China’s trade regime is also liberalizing from gold to oil to copper.
 
Factor price reform: Reforms of commodity price setting mechanisms are expected, including oil, natural gas, electricity, soybeans, cotton, and water.

IMPACT ANALYSIS

GOLD: China’s import should increase considerably in 2014 which will also provide support to the international prices of yellow metal

STEEL: Temporary steel production disruption may become common on environmental issues and over all Steel demand could remain weaker. high iron ore inventory could put pressure on prices

CRUDE OIL: Demand will be higher due to increase in refined products exports and fuel oil import to fall, china may be net exporter of fuel oil

NATURAL GAS AND COAL: Government emphasizing on natural gas based power plants and its demand to go up- thermal coal and met coal inventories high and rising demand demand expected weak

COPPER: Smelting and refining capacities to increase fast and import of concentrates to increase, large grid investment could lead to upside demand surprise

ALUMINIUM: If Indonesia’s bauxite export ban is extended then China’s need for alternative bauxite and alumina supply will go up

AGRI CROP: Government support for grain production very high, harvest expected much stronger- resulting in to lower imports. Soybeans and cotton in parts of the country are moving to a new target pricing system