Chinese reform to extend commodity boom

Competition likely to increase | Plan would lift restrictions on rural migration and ease them for medium-sized cities

LAUNCESTON, Australia (Reuters) — China’s planned economic and social reforms should extend the decade-long boom in demand for commodities while at the same time making the demand more price sensitive.


The 60-point reform plan still needs to be fleshed out, but initial indications are that the appetite for resources by the world’s biggest commodity buyer is far from finished.


From a longer-term perspective, the most important parts of the plan include lifting the restrictions on rural migration to smaller cities and easing them for medium-sized cities.


This alone should ensure that China’s demand for iron ore, copper and other base metals remains robust as housing and infrastructure is created across the country to cater to rising urbanization.


Much of this activity will also fly beneath the radar because it will take place away from mega-cities such as Beijing and Shanghai. However, this doesn’t mean the commodity demand will be any less real.


Although not one of the 60 points of the Communist Party plan, the overall effect is clearly aimed at raising the income levels for millions of people and moving them into a consumer-led society.


This has positive implications for overall commodity demand through increased buying of products such as motor vehicles, but also for agricultural imports, particularly soybeans, as people move up the protein chain.


Increased consumption of animal proteins means a boost in demand for soybean meal used as feed for most livestock.


China’s output of soybeans has also been largely stagnant for the past 15 years as the nation concentrated on increasing production of grains like wheat.


This means that China, already the world’s biggest soybean buyer, may have to increase imports at a faster rate in coming years.


The proposed land reforms may result in more efficient farms, but much will depend on how much land is allowed to be sold, who is allowed to buy it and how the revenue from land sales is distributed.


The other main element of the plan relates to allowing market pricing to play a greater role in pricing commodities.


China has been moving in this direction in recent years, especially with relation to refined fuel, and continuing this path will help align its domestic markets more closely with those for the rest of the world.


Pricing oil products according to global market signals will result in far quicker reactions to changes as demand adjusts to either higher or lower costs.


While this may do little to alter the overall import demand for crude oil over the longer term, it will make it more volatile and responsive to changes in global prices.