--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, April 16 China's economic
growth data contains a short-term positive and longer-term
negative for commodity demand in the world's largest user of raw
The positive is that gross domestic product (GDP) growth of
1.4 percent in the first quarter is soft enough to justify the
mini-stimulus spending on infrastructure planned by the
While many in the market will focus on the year-on-year GDP
growth of 7.4 percent being ahead of the market consensus for
7.3 percent, the more important figure is the quarterly outcome.
If annualised, this would come in at 5.8 percent, well below
the government's target for 7.5 percent growth.
Even a mini-stimulus that boosts spending on rail and other
infrastructure would be positive for demand for major
commodities, such as iron ore, copper, crude oil and coal.
There are, of course, risks to the short-term outlook in the
form of a crackdown on using commodities as collateral for
This heightens the risk that the record iron ore stockpiles
at Chinese ports will be sold onto the market, lowering prices
and demand for imports.
The same holds true for other resources, such as copper, and
more recently soybeans and gold have been added to the list of
commodities where demand has been artificially stoked by credit
There may be some relief in store in coming months as the
soft GDP numbers may spur the authorities to relax lending
rules, but even so, they will be reluctant to allow the use of
easy money to add to overcapacity, particularly in the
steel-intensive building construction industry.
The longer-term negative for commodity demand is that the
economic numbers show that China is having some success in
re-aligning its economy toward consumption and away from
While March industrial output rose to 8.8 percent from a
year earlier, up from 8.6 percent in the first two months, it
was below the consensus forecast for 9 percent growth.
Industrial production has been on a downward trend in recent
years, and the March growth rate is now less than half what was
enjoyed as recently as 2009.
In contrast, retail sales have held up remarkably well,
growing at 12.2 percent in March, above the forecast for 12.1
percent and beating the 11.8 percent for the first two months.
While the growth rate for retail sales has been trending
lower in recent years, it hasn't been falling as sharply.
It was always likely that growth rates across the various
sectors of the Chinese economy would start to ease following
decades of strong outcomes.
What is important is that retail sales is now outperforming
industrial output, a trend that is likely to continue.
This is what the authorities want and it seems clear from
official comments that they are satisfied with the direction the
economy is travelling in, and the pace at which it is getting
COMMODITY DEMAND GROWTH TO EASE
Translating this to commodity demand, and the transition to
a more consumer-led economy will result in lower growth rates
While this is widely expected, the key question becomes how
much lower will the growth in commodity demand be.
The key is to realise that for bulk commodities such as iron
ore, the base effect means that even small percentage increases
in demand result in fairly large growth in actual volumes.
But overall it would appear that the more optimistic
forecasts, which underpinned the latest round of commodity
mega-projects, may be short of the mark.
It is a great benefit of hindsight to say that the last
project built was the one that tipped the market into structural
oversupply, but now is the time to be cautious about plans to
build new iron ore and coal mines.
These two commodities, which also happen to be Australia's
largest export earners, are the most dependent on Chinese
Copper is probably better off given limited new supply and
declining ore grades at some existing mines, and liquefied
natural gas benefits from having several new customers other
Another threat to commodity demand is the weakening of the
Chinese yuan, which has dropped 2.8 percent so far this
year against the U.S. dollar.
The general view among developed nations is that the Chinese
currency remains undervalued and should continue its
appreciating trend of the past few years.
However, this may no longer suit the Chinese authorities,
who will no doubt be able to see the advantages of a weaker
currency in helping to boost export competitiveness while
allowing incomes to rise domestically in order to boost
A weaker yuan will make dollar-denominated commodities more
expensive, another factor that could crimp import demand, but is
also likely to make it harder for commodity prices to rise.
It's too early to say whether the yuan now has a new trend
toward depreciating, but it's a risk to the outlook for
What is clear is that the trend toward less
commodity-intensive growth appears to be established in China.
(Editing by Joseph Radford)