What ANZ Thinks About Risks To China & Commodities

ANZ Banking Group’s (ASX:ANZ) Chief Economist Warren Hogan explains to The Capital Network’s Lelde Smits why China is still a risk and the impact for global commodity prices.

The Capital Network: Hello I’m Lelde Smits for The Capital Network and joining me here in Sydney at ANZ Banking Group (ASX:ANZ) is the bank’s Chief Economist, Warren Hogan. Warren wonderful to have you here today.

Warren Hogan: My pleasure.

The Capital Network: ANZ has long been focussed on generating growth from Asia but the markets have been very worried about China this year. Why do you believe that is and do you believe this concern justified?

Warren Hogan: It is justified, and that’s because China is trying to undertake a transition that most other major economies when they've done it have failed, or at least have gone through a major economic downturn in the process.

And, that transition is from their industrial led model of growth, their export orientated led model of growth to a more consumer orientated, service orientated economy.

I believe they will make the transition, it’s critical for the world, not only critical for China, but as I said, no country has made the transition without some sort of major economic downturn.

The Capital Network: That transition does sound pretty scary, and especially if we look closer to home to Australia, the mining scene, lower demand from China really is going to hit commodity prices. Which commodities do you see being the worst hit and which may fare better?

Warren Hogan: Look I think most of the damage has been done in the commodity markets from a price point of view and it’s pretty broad based. Whether you’re talking base metals, whether you’re talking bulks, and oil now is under this extreme pressure since the start of the year so I think we’re not looking significant further extreme falls from here.

The Capital Network: So we may have bottomed out here?

Warren Hogan: We’re getting close to it, I believe. The real issue though is that China’s big surge in demand for particularly metal, which affects bulks is seemingly coming to an end. And, the next wave of demand from countries such as India and Indonesia, is slow in coming through. And, it may even be half a decade away.

The Capital Network: And bright spots on that commodity horizon, some that may that more resilient than others?

Warren Hogan: Look, there are going to bits and pieces and that’s all going to be determined by supply and demand balances, and particularly the amount of supply coming in.

We’re reasonably optimistic on copper from here. Gold, I think is going to continue to perform OK. And then of course soft commodities I think are going to be a bright spot over the next few years.

The Capital Network: And if we look globally, what are the main risks that you’re going to be paying attention this year?

Warren Hogan: The main risk is that the China slowdown turns into a China recession, that the RMB declines substantially, that financial instability in China spooks markets and that we have some sort of slump in global confidence. And, this is sort of the way the year has started.

The Capital Network: We’ll certainly be hoping that picks up by the end of the year but if we can fast-forward to then end, final question Warren, where do you see RBA putting interest rates by the end of this year?

Warren Hogan: We see interest rates in Australia coming closer to the global interest rate,

which of course is 0%, ours is 2%.

The Capital Network: So moving significantly lower from where we are at the beginning of the year?

Warren Hogan: No, just another 50 basis points we believe will finish lower. So Australia interest rates we believe will finish between 1-2% from where we started the year.

The Capital Network: OK well we’ll be waiting and seeing and hopefully not all of those risks eventuate but thank you so much for your time today.

Warren Hogan: My pleasure.




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