'We've Seen the Bottom' in China: Commodities Pro

Precious metals and energy prices slipped after China, one of the world's biggest commodity consumers, reported slower-than-expected first-quarter growth.

New multistory apartments are build across the street from older single floor homes in western Gansu province, China.
Eric Gregory Powell | The Image Bank | Getty Images
New multistory apartments are build across the street from older single floor homes in western Gansu province, China.

But despite disappointing gross domestic product data, China’s crude steel output hit a record high in March. Ric Deverell, Head of Commodities Research at Credit Suisse, sees this as a sign that China’s economy is turning around.

Crude steel production reached 61.58 million tons in March, up 10 percent from February and 3.9 percent from a year earlier, according to the National Bureau of Statistics.

“We know growth slowed last year and the beginning of this year, we know there was a weak first quarter. But if you look at the numbers within the quarter, it’s quite clear that January was the weakest month and we’ve actually seen a rebound in February and March,” Deverell said.

Deverell cited Chinese lending data, PMI, and the most recent rebound in steel production month-on-month in March to support his claim that China’s economy is making a comeback.

“I think there is a lot of evidence now that we’ve seen the bottom and growth momentum is actually improving as we go into the second quarter rather than getting worse,” Deverell explained.

Investors often wonder whether to base investment decisions off of data or what producers are doing. Deverell suggested that investors watch the market when gauging demand, especially for iron ore. He said that production output is a sign that sentiment is starting to turn up despite low growth data.

“We saw steel production in China go back to historically high levels and even in seasonally adjusted terms, things have started turning up again,” Deverell said. “A lot of people are talking about when it will turn up, but my contingent is that it has already started.”

Deverell predicted that the month-on-month growth that the Chinese steel industry saw in March will continue into the long-term.

“Not only are they picking up production, but exports have also started to pick up,” Deverell said. “I agree that with the iron ore price now moving back above $150 that margins are getting compressed again, but steel prices have actually moved up in the past couple of weeks. Obviously these guys feel that they are making enough profits to start stepping back into export markets.”