--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Aug 6 It's not hard to
find bearish commentary on the outlook for China's commodity
demand, but every so often a little bit of information
contrarian to the prevailing market views comes along.
Such a snippet is the latest China Commodity Index compiled
by ANZ Banking Group, which shows the weighted average price for
a basket of commodities imported by China rose to a three-month
high last week.
The index gained 0.6 percent in the week ended Aug. 2, with
only industrial metals detracting from the increase. It's 0.4
percent higher than three months ago, but 2.7 percent below the
level a year earlier.
Although it doesn't have a long history, the ANZ index is
useful as it tracks 22 major commodities and is weighted to
reflect China's consumption.
The idea that prices of commodities most commonly used in
the world's largest consumer are at a three-month high appears
at odds with other recent evidence that economic growth is
The rise in the official Purchasing Managers' Index to 50.3
in July from 50.1 in June has been about the only significant
recent Chinese economic data that has surprised on the upside.
It was also in contrast to the HSBC manufacturing PMI, which
fell to an 11-month low of 47.7 in July, well below the 50-level
that separates expansion from contraction on a monthly basis.
The concern over weakness in manufacturing and the impact of
the authorities' efforts to restructure the economy has led to
questions as to whether China will achieve its 2013 target for
7.5 percent growth in gross domestic product.
Worries over China have permeated to commodity-producing
countries like Australia, with fears rising that the boom in
natural resources is over and the country is now left with the
hangover of over-investment in mines.
But as the ANZ index reminds us, sometimes the actual data
doesn't quite tally with the prevailing sentiment.
However, it's worth looking at the index in detail, as the
softness in China's economic growth has sharpened differences
between the performance of different types of commodities.
Since the index is at a three-month high, a good place to
start is to look at the sector which has been the best performer
and that is agricultural commodities by some margin.
The agricultural sub-index, which has a weighting of 25
percent and contains pork, corn, rice, wheat, soybeans, cotton,
palm oil and sugar, has gained 7.6 percent in the past three
The only other sub-index with a positive return was the 1.6
percent gain for energy, which carries a 39 percent weighting
and is made up of Brent oil, thermal coal and natural gas.
Bulks, with a 21 percent weighting and consisting of iron
ore and coking coal, declined 3.2 percent.
Industrials, made up of copper, aluminium, rubber, lead,
zinc and nickel, declined 4.9 percent, while precious metals,
weighted a 3 percent and consisting of gold, silver and
platinum, slumped 11.4 percent.
The breakdown of returns does highlight that the
manufacturing sector has been the one doing it tough in China.
The performance for energy would have been stronger if it
weren't for thermal coal, with spot prices at Newcastle Port
declining almost 11 percent since the end of April,
and by 16 percent since the start of the year.
Coking coal, used in steel-making, is mostly to blame for
dragging down bulks, as spot iron ore prices .IO62-CNI=SI have
dropped by only 3 percent since the end of April.
However, it should be pointed out that iron ore hasn't been
steady over the past three months, first slumping to its 2013
low of $110.40 a tonne on May 31 and then rallying 18 percent to
close on Monday at $130.20.
Iron ore has gained on hopes that steel demand will increase
as China ramps up infrastructure spending, mainly on high-speed
If the ANZ index is to continue to post gains, it's likely
that the drivers will rotate, with industrials picking up as
manufacturing benefits from some domestic stimulus and a
brighter outlook for exports as the U.S. economy recovers.
Meanwhile the agricultural sub-index may struggle to
replicate its performance, given weakness in global prices for
soybeans, rice, palm oil and natural rubber.
Overall, the ANZ index serves as a reminder that too much of
the focus when looking at China's commodity demand is placed on
industrial metals and the manufacturing outlook.
While China's export-orientated factories have been the
driver of the nation's spectacular growth over the past two
decades, their relative importance to the economy is starting to
diminish, and so to will the influence of the commodities they
(Editing by Himani Sarkar)