“China is very important in the commodity sector,” said Walter de Wet, head of commodities research at Standard bank told CNBC Africa, adding that the Asian superpower has been one of the biggest contributors to global commodity demands.
In the last decade, China has increased its manufacturing sector output, establishing it as the world’s second largest economy. However, recent data shows that the manufacturing sector is on the decline.
According to the HSBC purchasing managing index (PMI), the sector dropped from 50.5 in December 2013 to 49.5 in January 2014.
Due to the impact that Chinese manufacturing contributes to the world economy, the decline will affect precious metals, base metals, energy and bulk commodity sector prices.
The environment is the same in the metals sector, where mines are deemed to be competitive when measured in their own currency but don’t make a significant impact in global markets. De Wet elaborated that, copper is at a deficit of 20 per cent even though it is in high demand for the construction of residential and commercial property.
“While we [South Africa] forecast surpluses, they are very small. If the prices remain the same then, there won’t be any new mines and this could lead to a deficit depending on the cost to extract copper from the ground,” explained de Wet.
According to the World Bank, the gold rate in exchange trade funds has decreased by 33 per cent in the US causing investor disinterest. The trend is the same in South Africa, as platinum and palladium are likely to outgrow gold.
“Gold will underperform platinum and palladium on a three to five year view,” added de Wet.
Despite the slump in commodity demand in 2014, progress within the commodity sector is projected for the future.
“If the European economy continues to recover then it can be positive for thermal coal and commodity demand will continue to grow in China,” added de Wet.