China and Commodities market in 2023

The headwinds from the latest global banking crisis has smogged the global economy which was already reeling under crisis for the past three years. In December 2022 optimism rose when the world’s second largest economy, China, announced the opening of the country post the Covid restrictions. Global markets were ecstatic with the expected tailwinds, IMF upgraded global GDP growth rate forecast for 2023 to 2.9% from 2.7% as it upgraded the Chinese GDP growth rate to 5.2% from ~ 3.5% for the same period.  Stock markets too reacted positively with global equity and debt funds pumping in close to $11.5 billon in December 22, which marked the first month of net inflows into China since February 22 and followed by an additional $30 billon of inflows in January 23. The spurt of growth in China was seen as a messiah to the slowdown in Europe and America. 

Chinese Stakes In commodities market

The Commodities Markets are the true reflection of the global economic conditions. As the world’s largest consumer and producer of commodities, China’s stake in the 2023 growth estimates for different major commodities is high. Their economic demand for raw materials plays a crucial role to boost the global commodities market like iron ore, steel, aluminium, copper, oil, etc., China is expected to account for 35% of the oil demand growth in 2023, 25% in copper, 41% in aluminium and 53% in Zinc! On a long-term basis too, the Chinese government’s ‘Make in China 2025’, aiming to promote high tech manufacturing, adoption of electric vehicles, infrastructure, etc. is expected to create a huge demand for many metals like steel, copper, zinc, aluminium, etc. Similarly, the buildup integrated oil to chemicals complexes like Hengli Petrochemicals is expected to create a big demand for oil, gas, etc.

Economic indicators from China

Post the Lunar New Year Holidays the economic indicators emanating from China, for February 23 and March 23, , have been very encouraging.

China’s budget for 2023 has been muted for housing and infrastructure sectors

China’s 14^th National Congress has spelt out the clear objectives for the Chinese economy for 2023. In short, the government has spelt out a conservative growth plan for 2023 as compared to expectations of an explosive growth. 

Some of the key pointers from the Congress which indicates a reserved growth rate:

• GDP growth rate in 2023 expected at 5% as compared to earlier expectations of 5.5% +.

• Fiscal deficit at 3% vs 2.8% in 2022 which indicates that the government isn’t going for a major fiscal stimulus. India`s fiscal deficit for 2023-24, for that matter, is 6.4%

• Importantly, the housing sector, which is the key for commodities markets, will be subjected to a control for “unregulated expansion”. 

• Infrastructure build, another sector which is vital for commodities, too will see a controlled spending only.

• Major focus will be on consumer spending, create more jobs and take steps to reverse the trend of declining population. China has been trying to convert its economy to a consumer spending led economy rather than an export and capital formation led economy for past many years.

Export markets will be muted due to global slowdown

Chinese growth over the last 20 years has been powered by its exports business. However, global markets are in a slowdown and the banking crisis will only exacerbate it further. Contribution of the next exports to the GDP crashed to – 42% in Q4`22 from 24% in Q3`22 due to the global slowdown. 

Chinese manufacturing industries, especially in metals like aluminium, zinc, and copper, are dependent to about 20-25% on the global markets, in basic as well as value added exports. For example, in the aluminium business, China is not only a major exporter of aluminium metal but also a major exporter of fabricated aluminium products to various parts of the world.

Geopolitical pressures on China due to Russia stance will play on sanctions

Due to China`s pro Russia stand in the war and tensions with the western world especially due to the Taiwan issue, Chinese trade will be the target of many trade sanctions. Apart from being a major trade partner with Russia, China has also been a trade hub for Russia. For example, China has been feeding alumina to Russian aluminium smelters while importing alumina from Australia and other countries to feed its own smelters. Chinese chips industry too has been a target for western sanctions. 

Private sector investment to the Gross Capital Formation (GCF) can be slow

Thanks to the political developments in China, the communist party has taken an iron grip on the country as well as over the private sector. Technology sector has been heavily under the government`s scanner over the last few years. The stories of treatment to private entrepreneurs like Jack Ma as well as the disappearance of the Chinese banker Bao Fan doesn’t exude much confidence in the Chinese private sector. Gross Capital Formation (GCF) contribution to the GDP has been lagging the consumption expenditure over the last 6 quarters. As the Chinese government doesn’t plan to increase its fiscal deficit much, GCF formation can be muted and hence a drag on commodities demand. 

Despite tailwinds from China seen so far this year, there are still many structural issues that will affect the commodities business demand in China in 2023. Hence commodity products, which are very dependent upon China, may have a limited upside. One key factor is that the government’s priorities as announced in the budget isn’t on infrastructure and housing. While secondly the global economic conditions and China’s geopolitical stands will be another hurdle.

Hence, I find it difficult to envisage China playing a major bull factor for the global commodities markets. However, in the long term beyond 2023 a resurgent Chinese economy will certainly be a key factor for the commodities business.