China will remain a major force in the global metals and mining industry base. Slower demand remains a key risk. This could disrupt the balance of most metals and mining commodity markets, contrary to investor expectations.

　　However, ongoing supply-side reforms could also lead to stronger-than-expected market fundamentals for certain commodities. Investors generally expect prices to remain volatile. Price volatility is clearly linked to China’s development and other policy risks.

Global Growth and Commodity Demand

　　Inflation is expected to continue to climb. In economics, higher commodity prices contribute to an upward shift in the cost curve, thereby increasing marginal cost support.The world economy, excluding China, is growing at a reasonable pace for the first time. For several years, a major component of commodity demand has been lagging or not growing. But now, it is growing. Strong demand growth and limited supply growth led to a peak in capital expenditures in 2013.

　　Higher commodity prices have reduced the number of non-performing loans and freed up capacity on bank balance sheets, as commodity producers hold high levels of debt. This trend also helps strengthen emerging market currencies by accumulating ever-increasing savings to weaken the dollar. This in turn lowers financing costs in emerging markets, and more leverage in emerging markets could even lead to a reconvergence of emerging market growth, thereby strengthening global synchronized growth.

China’s Economic Growth

　　China has stronger-than-expected demand, as well as supply-side reforms aimed at reducing capacity.

　　S&P projects GDP growth of 6.8%, 6.5%, and 6.4% for 2017, 2018, and 2019, respectively. Real estate and infrastructure investment are key drivers of strong commodity demand.

　　Commodity prices have performed strongly in recent months, particularly in the real estate sector. News data suggests that the fiscal deficit target may be lowered from 3% to 2.6%. This suggests that policymakers are looking for a deleveraging strategy rather than a sharp cut.

　　The metals mining sector continues to focus on improving balance sheets across the industry. The strong metals price environment has driven cash generation and financial flexibility.

Discretionary cash flow is substantial

　　Asset sales have been used to strengthen balance sheets. They even exceeded M&A activity. More importantly, lower leverage indicates that net debt is also decreasing, in addition to operating cash flow growth.