Roach Sees Commodity Headwinds as Miners `in Denial' About China

Roach: China Is Shifting Away From Commodities
  • `The China factor can’t be emphasized enough,' Roach says
  • China is seen shifting economy to commodity-light model

Commodities are at risk of extending declines as China’s slowdown hurts demand and the world’s largest user shifts its economic model away from raw materials, according to Stephen Roach, who said some producers haven’t yet faced up to the change.

“The China factor can’t be emphasized enough,” Roach, a senior fellow at Yale University, said in a Bloomberg Television interview in Hong Kong on Tuesday. China “has been the most commodities-intensive story that the world economy has seen in the post-World War Two period. Now China is shifting the model to more of a commodity-light, services-led economy.”

Raw materials sank to the lowest level since 1999 this week as China’s slowest expansion in a quarter of a century cut demand in a reversal of the pattern seen a decade ago, when booming growth in Asia fueled a surge across commodity prices that was dubbed the super-cycle. Continued concern about China, coupled with a rising dollar as the Federal Reserve raises rates, will make it difficult for commodities to rebound, according to Roach, a former non-executive chairman for Morgan Stanley in Asia.

‘Sinks In’

“Commodities are, after a super-cycle, obviously going the other way, big time,” Roach said. Some companies “are in denial that China is changing its character, its structure. It’s going to take a while for that to sink in, and until it sinks in, there’s still downward pressure on commodity markets and prices.”

The Bloomberg Commodity Index, a measure of returns for 22 raw materials, closed at the lowest in 16 years on Monday as supplies of everything from oil to copper outstripped demand. Base metals and crude oil fell on Tuesday, with copper trading 0.6 percent lower at $4,645 a metric ton in London, down 26 percent this year. The best way to heal lower prices are lower prices, as that takes supply out of the system, according to Roach.

Metals companies in China including producers of copper, aluminum, zinc and nickel have all announced cuts to supply or plans to rein in capacity growth to stem the price rout. Outside China, Glencore Plc pared copper production from mines in Africa, while Alcoa Inc. has curbed aluminum output.

While there is some evidence in China of stabilization, the slowdown is likely to continue through the first half of 2016, according to Francis Cheung, a senior strategist at CLSA Ltd. Growth will probably weaken to 6.4 percent next year from a decade average of 10 percent, according to Goldman Sachs Group Inc.

‘Definitive Change’

“This transition phase in China may be chaotic, but necessary,” Philippe Waechter, chief economist at Natixis Asset Management, said in a 2016 outlook report received on Tuesday. “It allows for a definitive change in the balance of economic strength -- to the advantage of services and at the expense of the industrial sector.”

While Glencore’s Ivan Glasenberg said in August he couldn’t read the world’s second-biggest economy and neither could anyone else, BHP Billiton Ltd. Chief Executive Officer Andrew Mackenzie has expressed confidence in his ability to comprehend the country as the company’s been in the business for decades.

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