China Goes On A Commodities Diet; Ag ETF Rises 1% - Barron's (blog)
By Murray Coleman
The world's biggest consumer of key commodities is dieting, as China is showing restraint from its usual feast on imported copper, soy beans and crude oil.
That's likely to impact agricultural markets, although not as much as industrial materials, some analysts argue.
In a review of the most recent trade data from Asia, Dow Jones' Tom Orlik suggests that tougher times could be ahead as overcapacity in real estate and falling demand for its goods abroad figure to slow China's economy.
The International Energy Agency forecasts Chinese demand for oil to grow by 5.2% in 2012.
But that appears a bit optimistic, asserts Orlik, as oil imports in the first three quarters of 2011 were up just 4%. Also, GDP growth is expected to slow in 2012 and the country's next five-year economic plan calls for a reduction in energy intensity per unit of GDP.
Cut the IEA's forecast by two percentage points and global oil demand growth would fall by 200,000 barrels per day, equivalent to 15% of the currently expected increase, he points out.
"With supply set to rise once Libya stabilizes, any increase in oil going to inventories will pressure high-flying Brent crude prices in particular," Orlik added.
Companies are likely to feel the pinch as well. The report notes that Alcoa (AA) this week said it expects aluminum demand to grow in the second-half. That's based on hopes that Chinese consumption will rise 10% to offset drops in several western markets, Orlik says.
But signs are indicating that China's being tempted to buy more copper after prices fell to lows close to $3 per pound earlier, he adds.
Also, rising incomes and demand for a high-protein diet aren't expected to drop-off appreciably in the short-run. That should put a floor to a drop in demand by Chinese consumers for soft commodities like soy beans, the piece notes.
But for industrial materials, "the prospect of a cyclical downturn in Chinese demand in coming months is real" and figures to leave those bullish on commodities "queasy," warns Orlik.
Today, the broad PowerShares DB Agriculture Fund (DBA) was most recently up 1%. In the previous session, DBA sank after the USDA cut its estimates for the U.S. corn crop while noting that inventories will be larger than originally forecast. Globally, corn reserves were projected at 4.9% higher than an earlier estimate.
The stock-minded Market Vectors Agribusiness ETF (MOO) was sliding 0.8%. Ag machinery maker Deere & Co. (DE) was down 1.8%. Meanwhile, shares of Potash (POT), the world's largest fertilizer producer, slipped late after spending much of the session on positive ground. Also, Mosaic (MOS) was trading flat.
Meanwhile, the Materials Select Sector SPDR (XLB) was falling 0.8% on the day.
14 Oct, 2011--
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