Little let-up for commodities as China powers ahead

By Tamora Vidaillet - Analysis

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.