August 16, 2018 / 6:15 AM / a year ago

COLUMN-Best commodity bets? Exposed to China and less open to trade: Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Clyde Russell

LAUNCESTON, Australia, Aug 16 (Reuters) - The recent gyrations in the world economy around Turkey’s currency and the escalating U.S.-China trade dispute have taken a toll on commodity prices, especially industrial metals.

However, while news-driven sentiment can clearly pummel markets, over a longer period of time not all commodities will be equally affected by the changing global economic dynamics.

The key to which commodities are likely to perform better is China, which is the world’s largest commodity importer.

Even if the Chinese economy does struggle under the weight of the trade barriers erected by U.S. President Donald Trump, there are still likely to be commodities that can hold their own.

The key is to look for commodities that are likely to remain in relatively high demand, and are subject to supply constraints.

On this basis, coal becomes the darling of the commodity complex, as Chinese import demand has been robust and will likely remain so as Beijing cuts back on domestic output as part of efforts to cut pollution.

China’s coal imports surged 15 percent to 175.2 million tonnes in the first seven months of the year from the same period last year, according to customs data.

And it’s not just China boosting coal, with the world’s second-largest importer, India, also increasing overseas purchases by about 7.8 percent in the first seven months to about 112.2 million tonnes.

While it’s true that Chinese import demand for coal has been partially driven by higher power generation because of the recent heatwave, the market may also be changing from a structural perspective.

China’s coal output fell 2 percent in July from the prior month to 281.5 million tonnes, the lowest in two years, the National Bureau of Statistics said on Aug. 14.

While coal has in recent weeks reached 6-1/2 year highs of around $120 a tonne, China is also importing more less-polluting natural gas, both in a liquefied state on ships and by pipeline from neighbouring countries.

Imports of pipeline and liquefied natural gas (LNG) rose 34.3 percent in the first seven months of the year to 49.43 million tonnes, according to customs data.

While the rate of growth has slowed from 2017’s breakneck speed, China is still increasing its demand for natural gas at a pace that is rapidly eating away expectations of an oversupplied LNG market after the commissioning of several new projects in Australia and the United States.

However, coal is still a better bet than LNG from a supply perspective, with major exporters Australia, Indonesia and South Africa all largely unable to boost exports as mines are already running at capacity and new projects have been lacking.

Only the United States can realistically supply much more coal to the global market, and its exports to China are now uncompetitive after Beijing slapped a tariff on them in retaliation for U.S. tariffs on its goods.

CHINA STIMULUS

The other commodities that China may exert a positive influence upon are those most likely to benefit from the current ramp-up in infrastructure spending, most likely iron ore, coking coal and steel.

Beijing has once again opened the fiscal taps in an effort to counteract any economic slowing caused by the trade dispute with the administration of U.S. President Donald Trump.

China rolled out a $14 billion urban railway plan on Aug. 14 and pushed local governments to speed up the issuance of special infrastructure bonds amid fears of a slowdown in fixed asset investment, which grew at 5.5 percent in the first seven months of the year, below market expectations.

While these, and other measures, do little to ease worries about credit quality in China, from a commodity perspective they are likely to underpin demand for the steel complex, and perhaps to a lesser extent copper, which is also used in construction for wiring.

Another factor worth noting is that while the commodities likely to perform better on the back of Chinese demand are all tradable, they are nowhere near as liquid as the ones that may underperform.

Crude oil, natural gas, copper and other metals such as zinc and nickel, all have deep and liquid futures markets.

While paper coal markets are well established, they are tiny in comparison, and the same can be said for iron ore and LNG.

They key to success in commodity markets in what may be challenging times ahead may lie in being a commodity that remains in demand in China and is less accessible to your average investor. (Editing by Christian Schmollinger)

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