Commodities to resume uptrend

Bulk commodity demand is unlikely to weaken despite China’s slowdown in infrastructure spending this year, said Amundi global commodity equity portfolio manager Nicolas Fragneau.

In fact, Fragneau expects the market outlook to remain positive over the next five to 10 years, thanks to growth drivers external to China.

In particular, the continued urbanisation and industrialisation of different developing economies are expected to play an important role in maintaining strong global demand for commodities.

“After the 2008 bubble and the massive sell-off linked to the financial crisis, commodities have resumed the strong upward trend initiated in 2002. The average length of a commodity’s cycle is typically 15 years.

“Taking the crisis as the midpoint of the current cycle, we foresee that market corrections will continue in the long run as demand from developing countries will keep rising,” Fragneau said at a media briefing on commodities here yesterday.

He attributed the initial upswing to China and Southeast Asia, but added that once infrastructure spending in these regions slowed down, global demand would continue to be buoyed by emerging economies in South America and the Middle East, thus allaying fears that China’s cooling down would critically damage the commodities market.

The commodity portfolio manager said he expected the current cycle to be prolonged beyond its usual lifespan of 15 years.

“Brazil, India, Ukraine and other developing countries are moving from agricultural economies to industrial ones. New cities and transportation links are being developed.

“Near the end of the cycle, when China’s growth starts to slow down in about five years, I expect other countries to emerge and drive commodity demand for another five years,” he said.

His view is one that runs counter to many analysts’ forecasts, which see China as key to the current upswing in the commodities market.

Commodities began rebounding in 2009 as economies worldwide struggled back onto the track of recovery, thanks to China’s massive spending on infrastructure build-ups while many Western economies were busy dealing with the crisis.

China’s decision in March to cut dependence on fixed-asset investments and to slow down its economy through taxes, credit tightening and currency appreciation is expected to weaken bulk commodity demand, a view that is held by JPMorgan Chase & Co’s chief Asian strategist and echoed by many. Fragneau believes such pessimism is misdirecting.

“China is still growing. We must not make the mistake of thinking it is not, just because it is re-orienting its spending from infrastructure build-ups to stimulating consumer demand. This means that while China cuts back on building more railways, more money can be expected to flow into the automobile industry, which is also commodities heavy.

“Also, commodities is a global story. Outside China, global commodity demand will remain strong not only because of developing countries but developed ones too,” said Fragneau, citing infrastructure upgrades as a long-term driver of the commodities market.

“For example, according to the American Society of Civil Engineer’s 2009 scorecard on existing infrastructure, US$2.2 billion (RM7.02 billion) worth of investments are needed in order for necessary upgrades.


This article appeared in The Edge Financial Daily, July 28, 2010.