8/6/2019 Slowdown

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BLOOMBERG

London, 4 June

A SUDDEN slowdown inChina may lead commodityprices to fall as much as 75 percent from current levels, Stan-dard & Poors said.

Unexpected shifts in gov-ernment policies or problemsin the banking sector may trig-ger such a slowdown, S&Psaid in a report e-mailed to-

day. The floor for aluminumis 65 cents to 70 cents a pound($1,433 to $1,543 a metric ton),compared with about $1.20 apound now and coppers flooris $1.50 to $1.75 a pound, com-

pared with $4.10 a pound cur-rently, S&P said.

Given the extent to whichChina has bolstered commod-ity prices, thats something thatwe have to be concerned

about, S&P analyst ScottSprinzen said by telephonefrom New York. The effortsby the government in China toslow growth are having an ef-fect on commodity prices. Its

been a pretty modest correc-tion so far.

The Standard & PoorsGSCI index of 24 commoditiesdropped 6.8 per cent lastmonth, the first decline since

August, as accelerating infla-tion in China fanned specula-tion growth will slow. Chinascentral bank has raised bench-mark interest rates four timesand boosted lenders reserve-

requirement ratios by threepercentage points since Sep-tember.

The central bank may raiserates ahead of a public holidayon June 6 because consumerprices are expected to rise to anew high in May, the ShanghaiDaily said May 31, citing UBSAG. Inflation rose 5.3 per cent

last month, exceeding the gov-ernments full-year target of 4per cent.

MODERATING GROWTH

Chinas gross domestic prod-uct may grow 9.5 per cent thisyear, down from 10.3 per centin 2010, according to a medianof 11 analyst estimates com-piled by Bloomberg. UnderS&Ps base- case scenario, Chi-nas economic growth will

moderate, while private con-sumption will remain strong,according to the report.

The current situation isnta bubble and its not going toburst, but there is a risk,

Sprinzen said.In case of a sudden slow-

down in the worlds biggestconsumer of commodities, ironores floor is $85 to $95 a met-ric ton compared with about

$170 now, seaborne coking coalat the mine has a floor of $100to $120 a ton, compared withabout $180 now, and hot rolledcoil steels floor is $475 to $525a ton compared with about $750

now, according to the report.In considering the down-

side for metals, we generallyassume that the global indus-try production cost curvewould set a pricing floor,

Sprinzen wrote. Specifically,we assume that prices are un-likely to fall for an extended pe-riod below the level at which10-20 per cent of world capac-ity cannot generate positive op-

erating cash flow before in-vestment.Commodities may easily

drop 25 to 40 per cent in the next12 months, presenting an enor-mous opportunity for in-vestors, David Stroud, chief ex-ecutive officer of TS Capital, ahedge fund manager in NewYork, said in an e-mail.

China slowdown

may lead to 75%dip in commodities