China's growth boosting commodity prices
The latest economic figures from China have put pressure on the dollar and boosted a number of high-yielding currencies, including the Australian dollar and the South African rand.
Commodities have reacted accordingly. Export growth in February was much higher than the markets had been expecting, registering a year-on-year growth of a whopping 46% - while imports were up by 45%. The latter was underpinned by the government's growth stimulus, while the former has boosted hopes of another step in the right direction in terms of global recovery.
The increase is even more impressive when we take into account the fact that the Chinese New Year, and its associated five-day holiday, fell in February this year as against January in 2009.
While these figures have obviously raised the temperature among some of China's trade partners who would like to see a revaluation - if only de facto - of the renminbi, the Governor of the central bank has subsequently iterated the government's cautious stance towards letting the renminbi float higher, as it has yet to be convinced (like most of the rest of us) of the strength of any economic recovery.
It may be interesting to look at the Baltic Dry freight index here as it is a barometer for global trade levels. Conditions are improving after the precipitous falls of 2009 and the trend would seem to be reasonably well-entrenched, if somewhat volatile (the fall in early February can be ascribed to the fall-out over the Greek Sovereign debt near-panic).
The figures gave a boost to platinum, palladium and silver in the precious sector, although gold has remained under pressure; although dealers are reporting physical support appearing in the market below $1,100 the recent price action has reflected continued profit taking and some concern that rising inflation may intensify expectations of interest rate rises in China which could, in theory, choke off physical gold demand.
Consumer prices rose by 2.7% year-on-year in February. The Governor of the People's Bank is aiming to hold inflation at 3% this year, but at least one local bank is forecasting rates closer to 3½%.
The counter-argument, of course, is that domestic concerns over inflationary forces will boost local investment demand for gold, which is already a powerful force in the market.
Figures compiled by GFMS Ltd for the World Gold Council indentify China's jewellery demand at 347 tonnes in 2008 (which is equivalent to 14% of world fabrication plus bar hording demand), while identified bar hoarding was 81 tonnes. In both cases China was the largest in the world and the combined tonnage of 428 tonnes amounted to 17% of world fabrication plus bar hoarding.
For that matter, China's usage in electronics, while a much more modest figure at almost 13 tonnes in 2008, rose by an average compound growth rate of 4% over the previous ten years although GFMS records that it fell in 2009 on the back of a sharp contraction in the first half of the year.
Electronics is one of the sectors in which China relies heavily on exports, so it will be interesting to see what numbers GFMS produce for Chinese electronics fabrication in 2010. For the time being, at least, China is relatively small in terms of electronic fabrication, being dwarfed by Japan at 116 tonnes, the US at 52 tonnes and South Korea with 33 tonnes.
GFMS puts China's gross gold fabrication demand (note that this is fabrication, not necessarily the level of domestic consumption. Domestic jewellery fabrication is smaller than domestic jewellery consumption) amounted to 342 tonnes in 2008; subsequent jewellery figures would suggest (this is this website's inference not a GFMS postulation) that fabrication in 2009 will have been a good bit higher as jewellery demand plus bar hoarding, as reported for the World Gold Council were up by 35 tonnes over the previous year.
Mine production in 2008 was 292 tonnes and is likely to have exceeded 320 tonnes in 2009, suggesting that domestic mine supply fell short of domestic fabrication demand by some 50 tonnes. Figures for domestic scrap supply are not yet in the public domain, but extrapolating from 2008 numbers and last year's price action suggests that it may well have been sufficient to fill the gap.
China' is obviously key to all commodity markets. Its demand for platinum accounts for more than 30% of global offtake and its palladium offtake accounts for over 20% of global offtake.
The latest Chinese trade figures, with their boost for the rand, will give platinum a short term shot in the arm at least, as the market is increasingly concerned about the cost pressures on South African platinum mine producers. Meanwihle China's silver demand accounts for perhaps 10% of the world total, a long way behind the US, which typically absorbs more than 20% of world silver demand.
It will be interesting to see what happens next in the gold investment sector in particular in the near future, especially as domestic Chinese bonds are now expected to return to 6% this year as a result of China's tightened policy on lending.
A leading local fund manager has said that bond funds are likely to be attractive this year and that the weight of money sitting in financial institutions points to rising bond returns - possibly as much as 6%. How these compete with gold (and other investment vehicles) for attention from private individuals is a function not only of investment polices but of demographics and this year could be particularly instructive.
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