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Asia is ripe with opportunities for Australasian commodity producers

Asia is ripe with opportunities for Australasian commodity producers

Australian and New Zealand commodity producers will find many opportunities in Asia but only if they understand the changing nuances of this vast market.

That was the consensus of a panel discussion on the first day of Commonwealth Bank’s 10th annual Global Markets Conference. Panellists were asked if Asia is still the Promised Land for Australian and New Zealand commodity producers. They believe it is but outlined a number of risks and caveats.

The shift in China’s commodity consumption

By 2030 China’s economic growth may have moderated to below 5%. However even economic growth of 4-4.5% will make a substantial contribution to global GDP because by 2028 China will be the world’s largest economy, predicts Rajiv Biswas, Senior Director and Asia-Pacific Chief Economist at IHS Markit.

China’s infrastructure will largely be built by then so he expects China’s demand for Australian commodities like coal and iron ore will flatten and gradually decline. Instead demand will arise from the infrastructure associated with China’s massive One Belt, One Road initiative that will stretch beyond Asia and Africa into Europe. 

And as an advanced economy with very high GDP per capita, Biswas sees many “exciting opportunities” for soft commodities in China. Bruce Turner, Director of Central Portfolio Management for Fonterra, agrees. Following a well-established pattern, China’s imports of dairy products are shifting from basic ingredients for making low-quality food to higher-value imports such as fresh drinking milk, table cheeses and emerging health and wellness products including gout-preventing yoghurt, he says.

The Asian Century has arrived

Biswas expects that the Asia-Pacific region will generate half of world economic growth in the next decade meaning “there are still lots of growth opportunities outside of China”. India’s population will be similar to China’s so he expects rising demand for high-quality food.

Just as Australia’s proximity to China gave it a freight advantage in reaching that market, its proximity to India is also beneficial, says Leonard Rowe, Director of Business Development, Asia-Pacific at AME. “India will pick up as China slows but they are two very different economies,” he says. Being a more developed services economy, Rowe predicts India will consume copper and aluminium rather than the iron ore and coking coal that China initially sought.

China’s government-led transition to a consumption economy means the trade tensions with the US may not have such a big impact on China’s economy as some people feared. However Dr Michael Taylor, Managing Director and Chief Credit Officer Asia Pacific at Moody’s Investors Services, foresees a potential shift in global supply chains. Instead of Asian companies sending parts to China for assembly and sale to the US, those companies may take on the assembly themselves and sell directly to the US.

No matter the impact of the US/China trade tensions on export-led Asian countries, “the demand for infrastructure remains,” says Taylor. He cited Asian Development Bank estimates that 45 countries in the region have an annual infrastructure need of US$1.5 trillion over the next 15 years.

Quality and low-cost production imperative

Rowe is confident that there is strong Asian demand for Australia’s commodities “but there has to be management of cost pressures because it is a very competitive market”. Turner added that the commodities must be what consumers want, and of top quality, complete with integrity of the supply chain.

Asia’s growing importance in the global economy and its huge infrastructure needs point to tremendous opportunities for commodity producers. Good infrastructure enables more industrial development and more rapid economic growth so “returns on incremental infrastructure will be very high,” says Biswas.

This information has been prepared solely for information purposes and is not to be construed as a solicitation, an offer or a recommendation by the Commonwealth Bank of Australia. It must not be relied upon as financial product advice and is not Investment Research. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this information, consider its appropriateness to your circumstances and if necessary, seek the appropriate professional, including taxation advice. We believe that this information is correct and any opinions, conclusions or recommendations are reasonably held based on the information available at the time of its compilation but no representation or warranty, either expressed or implied, is made or provided as to accuracy, reliability or completeness of any statement made. Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian credit licence 234945.