I think everything that has been, is and will be written about status of the Chinese economy has to be taken with a great deal of salt. Every day you get a full spectrum of opinions from the uber bearish to bullish. I guess the real truth is somewhere in the middle.

Slow Chinese growth rate to cap 2012 commodities gains

Expert warnings of a lower Chinese growth rates coupled with soft manufacturing data last week have shaken confidence in the strength of commodities demand in the country.

SHANGHAI (REUTERS) -

China's cooling economic growth will cap gains in commodities prices and temper the roaring earnings performance of mining companies. But easier credit and fresh spending on infrastructure will likely drive a strong medium-term outlook.

Soft manufacturing data last week coupled with warnings about economic risks by two of China's most influential government think-tanks have shaken confidence in the strength of commodities demand in the world's No. 2 economy, hammering miners' shares and pulling oil and base metals prices lower.

Beijing has lowered its 2012 growth target to 7.5 percent and is retooling the economy to focus on domestic demand and away from exports. The lower target may mean the end of a run of often double-digit annual demand growth for commodities which has strained global supply chains of everything from oil to cotton.

A slower growth rate in what is now a much larger economy than it was a decade ago still calls for big additional volumes of raw materials every year, and many analysts say there is little reason for the pessimism in some markets since China's target growth rate was revised. China's economy often exceeds the target, and Beijing still has plenty of options to stimulate growth if they economy falters.

"These are short-term risks. Beijing is likely to intervene to stimulate the economy over the coming months and that will support miners in the medium term," said Jonathan Stubbs, a London-based strategist at Citigroup.

"The shift in focus to consumption means there is going to be less support from China for rising commodity prices. So mining companies will have to 'sweat' their assets and make them work harder to enjoy outperformance."

Top global mining companies such as BHP Billiton, Rio Tinto, Anglo American andXstrata, reported large, but modestly weaker, half-year profits and said they were keeping their billions in cash to chase deals.

Commodities prices, such as copper and iron ore, are already trading at the upper end of the forecast ranges of many analysts, with room for upside in the second half if China's economy rebounds.

Many miners also seem unfazed; with some warning that even at a more sedate single-digit growth rate, they will still struggle to find the additional millions of tonnes to feed China.

"China is still the future for miners. It's a command economy and I can assure you it will be commanded to grow. It's currently engineering a very attractive soft landing. Don't let anybody freak you out," Robert Friedland, CEO of Ivanhoe Mines said at a mining conference last week.

FORGING AHEAD

Demand for industrial metals, especially iron ore and coking coal, has had a tough time over the past six months due to Beijing's clamp down on the property sector.

But demand for the steel seems to be on the mend.

Steel mills have grown more confident about the outlook and have stepped up their production as construction activities gain pace on the back of warmer weather and the building of millions of low-cost homes lifts consumption, traders said.

Steel futures jumped to their highest in two months this week, while iron ore prices are at a four-month high.

To make up for falling exports, Macquarie argues that China needs to boost domestic consumption which will prompt Beijing to launch a number of stimulus programs, such as for cars and home appliances - a move that would lift demand for copper, aluminium, nickel and refined oil products.

Shen Jianguang, Chief Economist for Greater China at Mizuho Securities, said separately that Beijing also needs to revive the property sector to allow provincial governments to restore land sales -- a big source of revenue which is crucial in preventing local government debts from turning sour.

China's refined copper demand posted double-digit percentage growth for 7 of the last 11 years to reach 7.63 million tonnes in 2011, according to CRU Group. Even if growth averages 7 percent over the coming years, it will still gobble up an additional 530,000 tonnes each year - an amount topping the world's No. 9 producer Poland's annual output.

To fill that demand is no small feat, especially for a metal which has been in supply deficit for most of the past decade and with world supplies are only expected to rise by 770,000 tonnes in 2012, according to estimates by consultancy Brook Hunt.

The International Energy Agency (IEA) sees oil demand decelerating in the world's second-largest consumer by 1 percentage point to 3.9 percent in 2012. That's the lowest rate of growth since 2008.

But that demand growth would still amount to 370,000 barrels per day in 2012, higher than South Sudan's daily output before the country's recent oil shutdown, and brings China's outright demand to 9.9 million bpd.

For iron ore, where Chinese imports have leapt from just 70 million tonnes in 2000 to 687 million tonnes last year, global supplies are still playing catch up with demand.

China alone is expected to suck in 40 million tonnes of additional ore in 2012, bringing total imports to 720 million, more than half the total annual increase in supplies of 70 million tonnes expected this year.

As China embarks on building tens of millions of social housing and developing its western provinces, where urbanisation rates are still low, its iron ore imports are forecast to peak at around 780 million tonnes in 2015, analysts said.

Miners are deploying billions of dollars on a capacity build out to meet the demand.

The world's top three iron ore miners, BHP, Rio Tinto and Vale, plan to ramp up ore output by more than 300 million tonnes over the next 3 years.

Top coal exporter Australia also has about $14 billion worth of committed new projects and expansions under construction, which will eventually add 80 million tonnes of coal.

"The super high-cost ones may struggle especially if they are coming online in a cyclical downturn, but we are going to need big expansions to keep up with growth in China and around the world," said Peter Hickson, an analyst at UBS.

"The planned projects may look like they'll add a lot of tonnes but issues such as delays will keep the market tight."