Bad news for commodities as China likely to slow further

IMF has cut its forcast for the country's growth from 8% to 7.75%

For commodity traders, there is more bad news in store. The International Monetary Fund (IMF) has cut its forecast for China’s growth from earlier estimates of 8 per cent to 7.75 per cent for 2013. This follows weak data coming from the country. The biggest impact of a slowing China will be felt in the ‘hard commodities’ (mainly metals) markets.

China was the reason for a major bull run in these commodities till 2007 on account of its huge requirement and spending in the run-up to the Beijing Olympics. However, a lull in spending by the country resulted in a downward slide in international prices of these hard commodities.

China’s influence on the oil and agro markets is not as much as it is on the hard commodities market. Though its population is the highest consumer of wheat and rice, it is also a major producer. The country, in fact, has been a net exporter in some years. The increase in domestic oil supply in the US has had a balancing effect on the increased demand from China, which is now its largest consumer.

But when it comes to hard commodities, China has a much bigger role to play. Since 2002, the country has been accounting for almost all of world’s consumption growth in nickel and tin, and half the world’s growth in consumption of steel, copper and aluminium while its consumption growth in lead and zinc has been more than world growth.

China consumes 40 per cent of all copper smelted in the world, 45 per cent of steel produced and 40 per cent of aluminium. Thanks to its construction activity, the country consumes 55 per cent of total cement produced in the world. A slowing economy does not augur well for producers or traders in these commodities. Inventories have been pilling up in most of the producing countries, capacity utilization continue to be low as more factories are being moth-balled till situation improves.

Recent results by metal producers also hint at a continued slowdown. None of the global players in steel, copper or iron ore see better prospects for world economy in the current calendar year.

For Indian producer a slowing China is all the more reason to be worried because the nearest and next port of destination that can absorb huge quantities is India. Increasing imports have led to declining margins for Indian companies in the recently announced quarterly numbers.

The only possible saviour is a weakening rupee. With China out of the way the most influencing factor for Indian commodity traders will be the rupee.