How slowdown in China could drive Copper higher

Last Updated : 10 August 2012 at 12:00 IST
Commodities are mostly about China and China is mostly about commodities. And this necessarily means that China, if it grows or if it slows down could fuel rallies. However both rallies would be distinctly different and both would have different implications.

Let me explain:

We have two scenarios: Either China can slow down or China can grow. The latter scenario, as per fundamental economics is good for commodities and warrant no explanation.

So let's focus on the former scenario.

China trade balance missed its standard mark when exports climbed just 1% in July from year ago period and imports rising 4.7%; Chinese trade surplus stood at $25.15 billion. Deutsche Bank, meanwhile has cut the Q3 growth of China to 7.5% from 7.9%; Q4 growth is estimated at 7.7% revised down from 8.1%. The bank expects 2012 GDP growth of China to be at 7.7% from 7.9%. 2013 growth forecast is pegged at 8.2% from 8.4%.

This data may not portray a rosy picture for commodities. As Bhavik Patel, Commodity Analyst with Commodity Online says:

“Slowdown in China is not good for commodities because usually the prices are driven up by demand only. Slowdown signifies drop in commodity prices but because of slowdown, the expectation will build up for stimulus measures and that will provide a relief rally in commodities.”

At the moment market will focus on slowdown data and after the correction, the relief rally will come on anticipation of stimulus measures, he added.

So we may have a stimulus rally; but which all commodities would benefit?

“Copper...” Patel said and added, “Copper would benefit the most as China is the biggest consumer, rest of metals would follow but copper would gain the most.”

But will there be a stimulus at all?

"China will not escape from the global slowdown," Banny Lam, China economist at CCB International in Hong Kong was quoted by Reuters as saying. He is expecting Chinese government to free the cash reserves that banks should hold, so that additional boost would be provided to the economy.

There are already reports that China has made some investments in the railway sector. Besides Chinese inflation has come down to 1.8%.

So, if the Chinese juggearnaut slows down copper would make losses; only to make a triumphant come back.

As published in: http://www.commodityonline.com/news/how-slowdown-in-china-could-drive-copper-higher-49664-3-49665.html