Good and bad…

Dave Tunnington, portfolio manager at Old Mutual SA reports.

According to him, overall, the strong economic growth in China and the resource-intensive stage in its economic growth are positive for commodity prices in South Africa.

Theimpact on individual commodities will vary depending on a number of factors.

The positive effects of China's emergence as a global economic power are being felt most obviously by:

* those commodities in which China is not self sufficient and which form part of the country's imports.

These include iron ore, alumina (used in aluminium), copper concentrate (used to make copper), manganese, platinum and oil;

* those commodities required at this stage in the country's economic development, for example materials used in construction, infrastructure development, power generation, etc.

Specifically, these would include iron ore and manganese (both inputs in steel making), copper concentrate and oil.

Commodities negatively affected:

The negative effects of China's economic growth are being felt by:

* commodities to which China has access to its own supply, and of which the country could effectively become a net exporter. An example is thermal coal that is used in power generation:

China has become a major player in the international traded market for this commodity. While exports have slowed due to strong local demand, the large reserves of coal in China make it a potentially powerful player in the longer term.

* semi-processed or beneficiated commodities. China has been aggressively expanding its smelting and refining capacities for a number of metals. Where the country is short of commodities it does not necessarily import the finished product, preferring to do its own beneficiation.

An example is copper - where the country imports copper concentrate, then does its own conversion into copper cathode, rod or wire.

Aluminium is another example. China imports alumina and uses its own smelters to convert this to aluminium.

The rapid expansion in aluminium capacity has been negative for the aluminium price, whereas those companies that sell alumina into China have benefited.

China has also rapidly grown its steel capacity, which could become a threat to international steel prices during an economic downturn.