China changes positive for metals

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China leadership switch likely to boost metals prices and be good for gold

China is the largest consumer of commodities in the world so this week’s changes at its top table matter to miners, metal traders and investors.

At the 18th Chinese Communist Party Congress a once-a-decade leadership change is about to take place. Later this week, the 25-member Politburo will be selected, with the all-powerful Politburo Standing Committee chosen from its ranks.

Xi Jinping, the current vice-president, is expected to become China’s next president and Communist Party chief, as current leader Hu Jintao steps down. The changes could be good for commodity demand with its new leaders keen to issue impressive economic numbers to get their 10-year reign off to a flying start. Indeed, the positive numbers have already started.

Released on Saturday, China’s October export number smashed analysts’ expectations, rising 11.6pc on a year-on-year basis compared with a consensus view of 10pc. Industrial (Mexico: ST2000.MX - news) production and retail sales also rose.

“It’s pretty clear that there is no hard-landing risk, that the economy will improve in the fourth quarter and we’re going to see 9pc year-on-year growth in the first half of next year,” Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole (Milan: ACA.MI - news) , told Reuters. It also looks likely that Mr Hu’s target of 7.5pc growth in his last year in office will be beaten.

Mr Xi is likely to want this trend to continue.

“We are confident that great efforts will be made to ensure that the start of the new government is accompanied by convincing economic data,” Commerzbank (Xetra: 803200 - news) analysts led by Carsten Fritsch, said last week. “To this end, further infrastructural projects above and beyond those already known are likely to be announced, which should be reflected in robust demand for metals.”

On Thursday, Mr Hu also said in a keynote speech that China will give high priority to rural areas in developing infrastructure and social programmes.

“We should better balance urban and rural development, boost rural development, work to narrow the gap between urban and rural areas, and promote their common prosperity,” Mr Hu said.

In September, China approved $156bn (£98bn) of infrastructure spend, in an attempt to boost slowing growth. However, despite the last decade being about iron ore and copper as large-scale building operations came to the fore, the next 10 years could be very different, according to Kieron Hodgson, a resources analyst at Charles Stanley.

“The growth in infrastructure spend in China is now moving to more secondary infrastructure such as telephone lines, which will be built out of fibre-optic cables and not copper,” he says. “China does not just intend to match western infrastructure, it intends to beat it.”

From a technological perspective, Mr Hodgson reckons that “lesser-known minerals such as antimony” will be increasingly important as the country develops some of the most sophisticated infrastructure in the world.

He is also very bullish on the prospects of precious metals, as Chinese citizens have only been legally allowed to own gold since 2004. Mr Hodgson points out that China is expected to become the world’s largest gold consumer this year and the rising numbers of middle classes are likely to continue to boost demand further.

China is already the world’s fastest-growing gold jewellery market, according to the World Gold Council (WGC (MCX: OGK1.ME - news) ), with consumers keen on purity. This means around 80pc of the gold jewellery sold in the country is 24 carat, the WGC says.

Despite the recent fall in prices, Mr Hodgson is also bullish on Chinese demand for diamonds, “the ultimate discretionary purchase”, he notes.

A strengthening Chinese economy is positive for commodities and the next decade could be very different in terms of commodity demand, but China really does look good for gold.