As China slows, is the commodity super-cycle over?

Anything related to China’s economy seems to provoke endless debates.  While one bloke from JPMorgan announced that hard landing is already happening in China, not all people in JPMorgan apparently agree, with Jing Ulrich saying that the worst for the real estate market is over, and some bloke for Gung Fangxiong claiming somewhere that the bull market for A shares has just begun.

Dong Tao of Credit Suisse, who has been among a very few of the sell-side economist who is more bearish, said that the commodity super-cycle of the past decade, which is in part driven by the growth of China, is over.  Again, apparently, not all of Credit Suisse seems to agree on anything.  Credit Suisse commodity research came up with a note stating the debates they have within Credit Suisse on this topic, with Dong Tao-led Economics team and Basic Material team claiming that the super-cycle is over, and the Global Commodity team feeling much more optimistic.

    The Great China Debate

    The pace of Chinese economic growth has gradually slowed over the past year as the economic stimulus has faded and government has tightened policy to ward off a surge in inflation. Not surprisingly, as growth has moderated, views on the outlook for both GDP and basic material consumption have diverged. Given the significance to global commodity markets, the Credit Suisse Securities Research department has had a healthy debate about the outlook.

    In this report, we share with you some of the contours of that internal debate. By focusing on the more difficult issues, we hope to provide clients with a useful resource to assist with their assessment of the various points of view.
    Where We Agree

    Across Securities Research, we agree that

        A hard landing is unlikely.

        Credit conditions have improved.

        A 2009 style of stimulus later this year is unlikely.

    Areas of Greater Uncertainty

    China Economics Team’s Core Views

        Liquidity has improved, but the demand rebound is likely to be muted.

        China’s demand super-cycle for commodities is over.

    China Basic Materials Team’s Core Views

        The stagnant growth outlook for China’s infrastructure and property sectors, combined with construction-biased Chinese demand, marks the end of the Chinese commodity super-cycle. We expect China to soft land and commodities to feel most of the “pain.”

        Cyclical factors – such as “normalization” of the high basis, correction of over-production/construction, and the rippling effects of the property slowdown on related sectors – should make 2012 a difficult year for Chinese commodity demand.

    Global Commodities Research Team’s Core Views

        Chinese basic material demand is likely to remain robust in 2012, with the weakest period already behind us

        The key driver, fixed asset investment, remains strong, while industrial production and exports are set to rebound in Q2.

        Chinese GDP growth is likely to remain in the 8%-9% range over the next year or two, with the contribution to the global total continuing to increase, given the much larger base. We do not think that it is possible to have 8% growth with weak investment given that investment accounts for half of GDP.

        Although the intensity of commodity growth is likely to slow over time, we expect this to be a gradual process, not a step change, this year. Still, as a result of strong Chinese demand, coupled with a gradual recovery in the West, global commodity prices are likely to, on average, stay well above the levels seen in the 1980s and 1990s – we believe that the super-cycle has further to run.