Emerging markets commodity demand: A stabilising path
LONDON (Scrap Register): While 2013 has seen tumult in emerging markets characterised by sizeable downgrades to growth expectations and a sell-off in EM currencies, commodity demand has not fared badly, said Barclays Research in a snippet.
According to Barclays, 2014 growth expectations for the BRICs have stabilised, fears of a China hard landing have dissipated and there has been a rebound in global manufacturing.
All these factors, in our view, paint a fairly positive picture for commodity demand next year. Commodities are very sensitive to GDP expectations and especially those from emerging markets (EM), which have been the engine driving commodity demand growth.
This summer, when EM were grappling with a sell-off in their currencies and witnessed substantial declines in their equity and bond markets, we analysed the potential implications for EM commodity.
“We did not expect any marked downward revisions to EM commodity demand as the underlying structural story had not altered, while China’s economic activity indicators had picked up with hard landing fears abating, and growth in developed economies (the US in particular) surprised to the upside,” Barclays added.
“Our economists were forecasting 2014 global GDP growth at 4% in March – a figure which has seen continued downward adjustments through the year to 3.4% currently. Key for commodity markets is that within the global picture, it is the large emerging markets that have seen sizeable downgrades to their 2014 growth forecasts,” they added.
However, in terms of timing, the bulk of the downgrades to EM forecasts were biased towards the middle of 2013. In the latest quarter, within the BRICs, our economists have made a modest downward revision to Brazil’s GDP and an almost negligible one for India’s GDP.
However, the magnitude of the cuts is modest compared to the changes made in the two preceding quarters and, importantly, our economists’ have made an upward adjustment, albeit a very modest one, to their China GDP forecast. To illustrate: Barclays 2014 China GDP forecast was revised down from 8.1% in March to 7.4% in June to 7.1% in September, and then raised slightly to 7.2% in December.
So, it appears for now that there has been a bottoming out in terms of growth downgrades. Our EM economists think the balance of risks may be tilted towards a more benign scenario than markets possibly have in mind for EM, in particular for H1 2014.
They note that Fed tapering seems largely priced into US rate markets, the recovery of global manufacturing will spill over into some cyclical support for EM and after significant adjustments in expectations, China is less likely to surprise on the downside.
Further, they highlight that recent trends in PMIs seem to suggest a continuation of the global manufacturing rebound. Although this recovery remains led by developed markets, it has started to feed through to EM economies, in particular those that are more open and manufacturing-oriented.
China’s base metals demand surprises to the upside but gold physical demand in India and China remains subdued
Concerns of a hard landing of the Chinese economy were a significant drag on commodity prices (especially base metals) earlier this year but those concerns have now dissipated. Base metals demand growth has picked up pace since Q2 13 and the latest data show base metals trend demand growth running at 8%, compared with 4% in Q1 13, even with sluggish global growth. Indeed, for the base metals, Chinese demand has been surprising to the upside.
However, the picture is different for gold, where physical demand remains subdued and where the window for prices to recover is brief. Gold demand in India took a hit following the depreciation of the Indian Rupee, which fell to record lows against the US dollar in the late August-early September period.
In addition to taking domestic gold prices to all-time highs, a series of policy decisions, including higher import duty on gold and adding restrictive measures, has dampened domestic demand despite a good Monsoon, and this being the seasonally strong period for gold demand.
While the Rupee has stabilised, reflecting a big improvement in India’s current account which, in large part is on the back of strong exports and soft imports (both gold, and non-gold), the seasonal upswing in Indian gold demand typically peters out in January so hopes for a demand recovery are low. Gold buying in China, however, could pick up ahead of the Lunar New Year.
Commodities and EM: more stability in 2014
While 2013 has witnessed much volatility in EM currencies and assets, especially ahead of expectations for the Fed to announce tapering in September, the picture looks more stable now.
Key EM countries have seen lowered growth expectations but the sizeable growth downgrades from earlier on this year have given way to more stable expectations.
Concerns about a Chinese hard landing have gone for now, while the recovery in global manufacturing continues. From a macro standpoint, all this bodes well for commodity demand expectations in 2014.