While western developed economies are slowing, China is reopening, and is likely to accelerate growth coming out of recent hard COVID lockdowns through significant stimulus.
There is a divergent story developing in the world economy, between the east and west in the current environment.
The US and broader western developed economies are slowing, driven by increased central bank intervention with the goal to stem surging inflation.
China dominates demand for many natural resources, offering some insulation for commodities from the impact of slowing world growth.
We are not entering an environment similar to the GFC, but there are some similarities. During the GFC, global commodities demand fell, while China accelerated out of the GFC using aggressive stimulus measures, a situation we see playing out at the moment.
Copper. During 2008-09, Copper demand dropped an average of 10 per cent ex-China, and rebounded 11 per cent in 2010 following the GFC. In China however, copper demand grew 13 per cent pa during the GFC period and 20 per cent in both 2009 and 2010 respectively, following stimulus post-GFC.
Nickel. During 2008-09 nickel demand dropped an average of 15 per cent ex-China, and rebounded 9 per cent in 2010 following the GFC. In China however, nickel fell only in 2008 (-13 per cent) with demand growing significantly from 2009 onwards.
Iron Ore. Iron Ore demand growth in China during 2008-2009 was supported by stimulus activity, growing 16 and 41 per cent respectively, before normalising slightly in 2010. Demand through the rest of the world was volatile during this period. China is without question a dominant force in commodities, consuming at least 50 per cent of core commodities. Iron ore is absolutely dominated by China, with in excess of 70 per cent of global demand.
Metal markets are currently tightly balanced in terms of supply and demand, with limited excess capacity available in any commodities following an extended period of underinvestment. Metals inventory remains low. Although demand may soften from the west, markets are tight, and any acceleration from Chinese demand should underpin prices that are already stretched due to low inventories and underinvestment in supply.
While the outlook for the west has slowed, China has already commenced the process of stimulating growth, and we expect this to accelerate through 2H 2022 and into 2023. From our perspective, physical activity has been constrained by lockdowns to date, but this is alleviating (albeit outside small flare-ups in COVID cases). We therefore expect that Chinese demand is likely to accelerate in the coming months.
Given that China represents at least 50 per cent of commodity demand, we believe commodities are likely to benefit from Chinese stimulus.
From an investment perspective, this does not mean we are aggressively invested in the current environment, given significant uncertainty, but this view does support us maintaining a positive net exposure in the current market.
