China's 'steady-as-she-goes' Economy Carries On

China is no longer a driver of commodity demand, rather it has become a constant factor that can be relied upon to import relatively steady volumes of major natural resources.

Both China's central bank and a respected think-tank expect further moderation in the economic growth rate next year, which underscores that the world's second-largest economy is still undergoing a structural transformation, but is unlikely to fall victim to a hard landing.

The People's Bank of China said in a paper published on Wednesday that annual growth will slow to 6.8 percent in 2016, from an estimated 6.9 percent this year.

This forecast followed a similar estimate from the Chinese Academy of Social Sciences, which said the economy may expand between 6.6 percent and 6.8 percent because of weak external demand and slowing domestic investment.

The central bank said it expects fixed asset investment, an important driver of commodity demand, to rise 10.8 percent in 2016 from this year.

While that sounds positive for commodity demand, the bank also said that "downward pressures on growth will persist for a while due to overcapacity, profit deceleration, and rising non-performing loans".

But the People's Bank also highlighted several positives, including expected retail sales growth of 11.1 percent next year and a stabilisation of the key residential property sector.

Taken together, the economy picture China is painting for 2016 is largely a continuation of what has happened this year, with some upside as higher government spending kicks in.

This is the case even taking into account some widespread market scepticism over the accuracy of China gross domestic product figures, with several analysts saying the real rate of growth is most likely at least a percentage point below the official numbers.

But for commodity import demand, what matters is whether China's economy will be growing at all, and how much of that growth will be resource-intensive.

The base case for China's commodity demand is that the import volumes seen in 2015 are at least likely to be matched in 2016, with scope for a modest increase for some.

SOME UPSIDE POSSIBLE
If there is an uptick in property construction and infrastructure spending on railways for example, this may give a little lift to iron ore imports, as well as copper and other minor metals such as nickel.

But the key point is that China's economy is unlikely to grow so much in 2016 that it creates significant extra demand for commodities.

Full-year data isn't yet available, but in the first 11 months of the year, iron ore imports lifted a small 1.3 percent from the same period in 2014, to 856.55 million tonnes.

Unwrought copper imports were down 2.8 percent, but ores and concentrates were up by 11 percent, as China smelted more of the industrial metal.

A growth rate next year largely similar to 2015 probably means similar rates of growth in commodity import volumes.

Of course, there are always going to be outliers, coal comes to mind, with imports having dropped 29.4 percent in the first 11 months of 2015 from the same period a year earlier.

Beijing's ongoing campaign to limit coal use means a rebound in imports seems unlikely, but a decline similar to what's happened this year may be too pessimistic.

Crude oil imports rose a strong 8.7 percent in the first 11 months, but much of the growth was channelled into strategic storage, as well as sharply higher exports of refined fuel.

There are some question marks as to whether China has sufficient new storage available to keep stockpiling at the rate it did this year, meaning the risk is for crude import growth to moderate in 2016.

Part of the strong crude imports was related to rising demand for gasoline as car sales gained, which also had a positive flow-on effect for imports of rubber, with inbound shipments of both natural and synthetic rubber jumping 12.3 percent in the first 11 months of 2015.

With vehicle sales expected to remain robust, rubber imports may enjoy another year of solid growth in China.

With the outlook for China's commodity import demand being a steady-as-she-goes picture, what does this mean for prices?

Not too much, as for most commodities the issue is about oversupply, and this still has to be worked out, although 2016 may see the point of capitulation reached for some of the worst affected, such as iron ore, steel and aluminium.

By Clyde Russell