Palladium, Nickel Seen Gaining From China Consumption Shift

Aluminum, nickel, palladium and gold may benefit from China’s shift toward consumption-driven growth from an economy fueled by investment, while agricultural products are set to lag behind, according to Barclays Capital.

Commodities with so-called strong links to rising living standards and changing tastes such as coffee stand to gain from the transformation, analysts led by Kevin Norrish wrote in a report dated yesterday. The growth in demand for steel, copper and zinc may slow as their intensity of use drops, they said.

Premier Wen Jiabao wants to tilt the world’s largest user of base metals toward increased consumption and away from exports and capital spending. BHP Billiton Ltd. (BHP), the world’s biggest mining company, said last month that the growth in China’s steel production is slowing as the economy shifts to focus more on consumers than large building projects.

“China’s government is targeting both a reduction in average GDP growth and a change in its composition, moving towards a less investment-intensive, more consumption-orientated growth model,” Norrish wrote, referring to gross domestic product by its initials. The planned shift “has major implications for future commodity demand.”

Demand from China helped the Standard & Poor’s GSCI index of 24 commodities gain every year since 2002, apart from 2008 as the collapse of Lehman Brothers Holdings Inc. presaged the worst global recession since World War II. Copper in London, which rallied from less than $1,500 a metric ton in 2002 to a record $10,190 last year, traded at $8,254 at 4:13 p.m. in Shanghai.

Slower Growth

China grew at the slowest pace in 11 quarters in the first three months of the year, expanding 8.1 percent from a year earlier, the National Bureau of Statistics said on April 13. The government will aim for growth of 7.5 percent this year, down from an 8 percent goal in place since 2005, Wen said last month.

Higher demand from the automotive, renewable-energy and power industries will help related commodities including palladium and gasoline as urbanization continues and the country reduces emissions, Barclays Capital said.

Aluminum may benefit from China’s construction of new power grids, while increased use of stainless steel in consumer goods may aid nickel, the analysts said. Palladium would be used in more pollution-control devices as car ownership expands and emissions standards are toughened, they said.

Auto Market

China, the world’s worst polluter, overtook the U.S. as the largest auto market in 2009, ending more than a century of American dominance. Automakers account for almost two-third of global palladium consumption.

As incomes rise and China loosens regulations on gold trading, bullion investment and jewelry demand should increase, the report said. China’s gold demand has been pent-up for a long time, it said.

China, the largest gold producer, overtook India in the second half of 2011 as the biggest gold-jewelry market, according to the World Gold Council. While overall Indian demand last year was the largest on an annual basis, it may be surpassed by China this year, the council said.

“Agricultural commodities are amongst the biggest losers, reflecting the fact that China’s food consumption is already on a par with more-developed Asian nations,” the analysts wrote.

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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