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Session Summary. Global Commodities: Riding the Roller Coaster

February 4, 2010

David Peattie concentrated on China from a demand perspective and provided a bullish view, arguing that the country is going to grow increasingly dependent on imported energy resources, including gas and coal. Oil and gas consumption in China is to double by 2030, he believes. Mr Peattie pointed out the new opportunities opened up by recent advances in technology of extracting shale gas. This, along with increased supply of LNG, will reshape the market, both in the US and Europe. Cost inflation in the oil and gas industry continues to be a major issue, supporting high energy prices. He is cautious on the outlook for growth in energy supply from alternative sources and sees high capital costs as the main hurdle.

Artem Volynets argued that the Chinese aluminum industry might not be viable in the long run, the country being an importer or energy resources. On the demand side, the drive is going to continue, supported by the continuing urbanization of China and India. Mr Volynets sees the possibility of further substitution of steel for aluminum, especially in car manufacturing. The switch from an investment-led growth model to a consumer economy in China will result in lower growth rates, but the positive momentum is only going to become stronger.

Alexander Abramov concentrated on the steel industry outlook. He does not see US and Europe consumption reverting to pre-crisis levels for another two to three years. China, however, will continue to grow. The shortage of iron ore and coking coal is likely to manifest itself as stronger than before. Mr Abramov is skeptical about the Chinese authorities’ plans to shut down inefficient production capacity. Brazil should play an increased role as a supplier of semis to the US and Europe. Mr Abramov also sees increasing demand for African coking coal. Production costs have been significantly reduced during the crisis. The pace of industry consolidation is likely to slow compared with pre-crisis levels, and innovation will drive further efficiency gains.

Guy Elliott sees strong momentum in Chinese and Indian demand for raw materials remaining intact in the medium to long run. The supply response in many areas is likely to come from projects with higher marginal costs. Risks to the bullish case also exist, especially those related to the expected withdrawal of the stimulus programs in many economies. On balance, demand is nevertheless likely to prevail, especially in the long term. High commodity prices will bring more competition in the resource industry.

James Barty provided a more cautious view of the commodities markets. Higher prices are going to lead to a supply response, and one should not underestimate the impact of technological innovation that is important for the prospects of shale gas. In the oil and gas sector, producers have incentives to cheat. Overall, the oil price seems likely to be range-bound in the near term. As regards China, one should be aware of the possible structural shifts in the country’s economy. Substitution among materials and commodities is another important factor, he believes. Gold is an inflation and deflation hedge, but is likely to be very vulnerable when rates finally do go up. Mr Barty noted possible negative triggers for commodities, such as signs of monetary tightening by central banks.

George Cooper: China still has much room for demand growth and no issues with debt burden, Mr Cooper said. Speculative inflows of money into the commodities space might destroy value, as the volatility is increasing. Risks to commodities include a major slump in Chinese economic growth, which is not entirely impossible due to the existing imbalances in the system.

 

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