The Attention Span Of Commodity Markets

IPEEXJan.pngBy John Richardson

PARTICIPANTS in commodity and financial markets sometimes appear to have very short attention spans.

But they are merely doing their jobs by seeking to stretch out rallies as long as possible through claiming everything that was being discussed a few months, weeks or even days ago is suddenly invalid. (see the above ICIS Petrochemical Index for December, which illustrates the broad-based rise in petrochemical prices, using in this case Northeast Asia an example)

Just occasionally, though, and off-the-record of course, you get moments of honesty such as the polyolefins trader who said last week: “Is there a real improvement in polyolefins demand or is this the result of short-term tight supply and an improvement in sentiment?

“Quite frankly, I don’t really care as I’ve made good money since November and can now afford to play very cautiously over the next couple of months, without worrying about missing out on anything further.”

Nothing has changed in China, just the mood music.

Still, at the moment it can seem as if:

*China no longer needs to worry about economic rebalancing, inefficient investments and bad debts.

*The West is fine and so China’s exports are once again in long-term boom territory, following the unexpectedly strong growth in December exports.

In Australia, febrile excitement grips the commodities business as 2013 forecasts are revised upwards.

For instance, the Business Spectator writes in this article: “In its third quarter presentation to analysts Alcoa saw growth of 4% to 7% in China’s automotive production for 2012, an 18% to 21% fall in heavy truck and trailer production and mid-single-digit growth in commercial building and construction sales and beverage can packaging.

“For 2013 it is now forecasting 7% to 10% growth in automotive, 12% to 19% growth in heavy trucks and trailers, 8% to 12% growth in beverage can packaging and 8% to 10% growth in commercial building and construction.”

But hold on, weren’t many people talking about overcapacity across many industries in China just a few weeks ago? Might not all this extra production end up, unsold again, in inventories if consumption remains weak?

In autos, for example, the People’s Daily, the government-controlled paper, was warning as recently as last September of the dangers of overcapacity. Domestic demand growth for autos had last year fallen off a cliff compared with 2009-2010.

The recovery we have seen in commodities markets, including petrochemicals, might well have been driven by politics, both in China and the US.

In China, between May and September last year bank lending jumped 15% compared with 2011 as $1.1 trillion was disbursed from state-owned banks for infrastructure investments. This seems to have been designed to shore-up popular support ahead of the leadership handover.

And in the US, Barrons, the investment newsletter, suggests that the increase in US Q3 real GDP growth to 2% from 1.3% in the second quarter might have been the result of increased federal government spending,mostly on defence, ahead of the Presidential election.

The essential point, of course, is that commodity and financial markets may well be getting excited about what is historic data. This extra government money is likely to have still been benefiting the China and US economies in November and December, economic data from which has helped drive the current recoveries.

In the case of China, now that the leadership handover is over, official bank lending is on the decline.

“Loans were 454.3 billion yuan ($73 billion) (in December), according to People’s Bank of China data, compared with the median estimate of 550 billion yuan in a Bloomberg News survey of 37 analysts and last year’s 640.5 billion yuan,” wrote the wire service last week.

This supports the argument that China’s new Politburo is now withdrawing stimulus as it pursues a new economic model.

Fellow blogger Paul Hodges, for example, wrote last week that China is returning to earlier priorities, crystallised in this statement of intent from the China Academy of Sciences: “A completely new policy approach is emerging. It’s about giving farmers a bigger share from land deals, it’s about changing local governments’ reliance on revenues from land, and it’s ultimately about a fairer system of sharing China’s economic growth.”

And, as far as the West goes, given the problems in Europe and the row over raising the US debt ceiling, how could anyone be anything but cautious over China’s export-growth outlook for 2013?

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