Citi sees slower commodities demand growth as China recedes

[SINGAPORE] Global commodity markets will see slower and less synchronized demand growth from across the world as China's dominance fades, according to Citigroup Inc.

Global demand expansion, which centered on the rise of China in the 2000s, will slow in the next decade and be driven increasingly by India, Southeast Asia, the Middle East, Latin America and Africa, the New York-based bank said in a report e- mailed on Tuesday. While demand will increase from these regions, dubbed the "Emerging 5", it won't be enough to offset the impact of slower growth from China, Citigroup said.

Commodities tumbled to a 12-year low on Monday, with crude oil in New York slumping 18 per cent in 2015. Inventories are rising after a decade-long bull market spurred farmers, miners and drillers to increase production just as economic growth slowed in China. The world's biggest metals and energy consumer grew at the slowest pace since 1990 last year.

"China's economic transition and the inability of other emerging markets to pick up the slack are driving slower demand growth across the commodities complex," analysts including Ivan Szpakowski and Ed Morse wrote in the report. "The extent of slowdown is likely to vary by commodity."

The Bloomberg Commodity Index, which tracks 22 raw materials, was at 97.4738 on Tuesday, down 6.6 per cent this year. The gauge slumped to 96.4714 on Monday, the lowest level since June 2002.

Hard Hit Among the hardest hit raw materials from China's slowdown are bulk commodities such as coal, iron ore and steel due to their exposure to China's manufacturing, infrastructure and real estate sectors, according to the report.

Oil consumption growth in China and the Emerging 5 will slow to 2.7 per cent in 2014-2020 and 2.3 per cent in 2020-2025 from 4 per cent in 2001-2011. Emerging market demand for base metals will expand about 3 per cent to 5 per cent into the 2020s, while wheat consumption may rise about 0.9 per cent annually from 2014 to 2020, the bank estimates.

The Middle East will probably be the top source of oil and gas consumption growth, while India will be the top driver for coal, it said. For steel, demand growth will be about equally spread across the Middle East, Southeast Asia, India and China.

Only in base metals China's predominance may remain unchallenged, with the country accounting for about half of global demand. The gap between it and the 'Emerging 5' will shrink significantly, Citigroup said.

"Global demand as a whole should become less cyclical as a downturn in one key economy has a lesser impact on overall demand," the analysts wrote. "In other words, commodities demand should be more stable."

BLOOMBERG