Little let-up for commodities as China powers ahead

BEIJING (Reuters) - China is a long way from satisfying the voracious appetite that has powered a five-year global bull market in commodities from iron ore to soybeans.

With the main commodity futures indexes well below last year's highs, efforts by China to reduce its reliance on imported raw materials have encouraged those skeptics who scoff at talk that a long super-cycle in commodities is now well-entrenched.

But most analysts see things differently. They say it's no accident that China has accounted for over 60 percent of the increase in world demand for many commodities in recent years.

China is undergoing the greatest migration from the land to the cities the world has seen, generating demand for steel to build skyscrapers and cars and for copper to carry electricity.

And the new armies of urban industrial workers, their ranks swelling by about 10 million a year, are spending more of their higher wages on meat, underpinning the price of grains.

"Most commodities in China still look extremely bullish and China's influence looks fairly positive," said Adam Rowley, a commodities analyst with Macquarie Bank in London. "On trend, we would see China as an unstoppable force in these markets."

China's economy is likely to grow by 10.9 percent this year, marking the fifth straight year of double-digit expansion, a top government think-tank said on Wednesday. The last time the economy grew faster was in 1994.

To support growth, China in 2006 added electricity-generating capacity that was almost as much as France's existing capacity.

Yet, befitting a developing country, China's consumption of commodities is still low. It uses less than 2 kg (4.41 lb) of aluminum per person a year, compared with 12-14 kg in Japan and North America.

"As long as you have growth continuing at the rate it is now, and the industrialization in China, I don't see the demand for metals coming off at all," said Helen Henton, head of commodities research at Standard Chartered Bank in London.

SUPPLY RESPONSE

Still, at the margin, China's response to fast-rising prices has started to weigh on some commodity prices, analysts say.

For instance, substitution with cheaper raw materials has slowed Chinese demand for copper and nickel.

Rowley also noted that Chinese companies boosted alumina production by around 54 percent last year, helping to drive down the spot price from a record $650 a tonne in the first quarter of 2006 to around $350 now.

Malcolm Southwood of Goldman Sachs JBWere said that while China's demand will buoy many commodities, it could expand its output of others sufficiently by 2009 to darken their price outlook. In a note to clients, Southwood said alumina, stainless steel, steel products and nickel could fall into this category.

Increased efficiency in processing commodities could also dampen demand, experts say.

On the energy front, China's dependence on imported oil will continue to grow even if Beijing introduces a fuel tax and raises fuel efficiency standards for vehicles, said Yang Fuqiang, head of the China office of the U.S.-based Energy Foundation.

Foreign oil may account for 55 percent of total consumption by 2010 and 65 percent by 2020, Jiang Xinmin, a researcher at the Energy Research Institute, a government think-tank, said on Saturday. China now imports about 46 percent of its oil.

As stockpiles of key grains drop, China could also become a significant net importer of agricultural products, analysts say.

POLICY SHIFTS

Furthermore, recent shifts in government policy should also prop up a number of commodities.

Export taxes imposed on certain metals to cap output of low value-added goods that create a lot of pollution will slow production of aluminum and ferro-alloy in particular, said Michael Komesaroff of Urandaline Investments.

"That will be supportive of prices. Demand will be strong, but China will start initially to be balanced and will then resort more and more to the world economy," he said.

In weighing up China's importance for global commodities, a comparison with fast-growing India, which also has a population of more than 1 billion, is instructive.

Both could use about 10 percent more copper this year, Southwood of Goldman Sachs JBWere said. While that would boost Indian demand by 35,000 tonnes, China's consumption would soar 400,000 tonnes, he said.

Jim Rogers, a noted fan of commodities who helped found the Quantum Fund with George Soros, said that, short of a bird flu epidemic, rising demand in China and the rest of Asia was bound to prop up many commodities even if there was a U.S. recession.

"We're in a bull market for commodities," Rogers said from Singapore. "This bull market has a long way to go."