Bulk Commodities Update – June 2015

The changing composition of China’s growth model – towards services rather than heavy industry – means it is less commodity intensive than in the past.

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Key Points:

• China’s economic growth has continued to slow in the early months of 2015. First quarter national accounts showed China grew by 7.0% yoy, down from 7.4% in 2014. The changing composition of China’s growth model – towards services rather than heavy industry – means it is less commodity intensive than in the past.

• According to World Steel data, global steel production was 535 million tonnes in the first four months of 2015, a decline of 1.6% yoy. Output in China fell more moderately, down by 1.0% to 269 million tonnes.

• China’s apparent steel consumption has fallen in early 2015 – down by almost 5% over the first four months of the year – reflecting the weak demand from China’s construction sector. We expect the country’s steel demand to remain subdued across this year.

• Key thermal coal consumers are lowering demand – with China addressing pollution and Japan nearing a phased restart of nuclear capacity.

• Reflecting the softer thermal coal demand conditions and excess capacity for supply, we expect weak conditions to persist. The 2016 Japanese financial year contract price is forecast at US$62 a tonne (from US$67.80 this year).

• Further cuts to metallurgical coal production are likely to be necessary, given the sharp fall in prices across recent months. Quarterly contract prices are forecast to average US$105 a tonne in 2015 and US$95 a tonne in 2016, though current weakness highlights downside risk.

• Higher cost iron ore production is finally exiting the market, however this excess supply will limit any significant upward pressure on prices. We forecast spot prices to average US$60 a tonne in 2015 and ease further to US$57 a tonne in 2016.

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