--Clyde Russell is a Reuters columnist. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, April 16 (Reuters) - 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 materials.
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 authorities.
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 financing deals.
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 financing deals.
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 export-led manufacturing.
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 there.
Translating this to commodity demand, and the transition to a more consumer-led economy will result in lower growth rates for imports.
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 growth.
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 than China.
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 consumption.
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 commodity demand.
What is clear is that the trend toward less commodity-intensive growth appears to be established in China.
Editing by Joseph Radford