Downturn in China Would Slam Commodity Prices
Source: Reuters (6/2/11)
"While a severe downturn is unlikely, China's growth could slow more markedly at some point."
A sharp economic downturn in China is unlikely, but a downside scenario would lead to commodity prices sliding by about 40%-60%, ratings agency Standard & Poor's said on Thursday.
Copper HGc1 would be at risk of falling to $1.50-$1.75 per lb from $4.10 and iron ore could descend to $85-$95 a ton from $170-$175 if the world's biggest consumer of commodites was hit by a severe slowdown, a report said.
"Standard & Poor's expects that China will sustain high growth rates over the next few years... however, we also recognize that China's growth could slow more markedly at some point," it said.
The agency has some concerns that the strong rise in commodity prices may represent an "unsustainable bubble", S&P said.
Before a commodities sell-off in early May, the Reuters-Jefferies CRB index .CRB of 19 commodities had gained about 50% in the previous 11 months.
"If current market conditions in commodities do represent a bubble, a significant deceleration or downturn in China and other emerging economies could ultimately cause the rupture."
If the Chinese government tightened monetary policy too much, it could trigger a slowdown, leading to a sharp fall in the demand for commodities, hammering prices.
Prices would find a floor around the level at which 10%–20% of world capacity would fail to generate positive operating cash flow before investment, it said.
Aluminium CMAL3 would likely slide to around %0.65–$0.70 per lb from $1.20 a lb currently and hot rolled coil steel would fall to $475-$525 a ton from $750-$760.
S&P's base case is that China's strong economic growth rates in recent years will moderate, but private consumption is likely to remain strong.
"China is among the least likely of the major economies to experience a major downturn over the next few years," S&P said.