Chinese growth brings the commodities industry to the fore
China's inflation is easing, leaving scope for continued strong growth in the Middle Kingdom. This is to the benefit of the commodities industry and its subcontractors, including Metso.
The Chinese growth story is also the tale of an ever-increasing demand for commodities.Given the scarcity of commodities, continued economic growth in China may translate into good prospects for companies that are, in one way or another, involved in the commodities industry.
A company benefiting from the demand for commodities is Finnish Metso, which is in the Danske Invest Europe High Dividend portfolio, among others. Metso is a global engineering corporation, producing equipment e.g. for the mining industry and the oil and gas industry.The company is also a major service provider, offering service contracts on their equipment.It employs about 29,000 staff and recorded sales of EUR 5.6 billion in 2010.
Metso has a strong long-term position
According to Peter Nielsen, Chief Portfolio Manager of Danske Capital, who is responsible for investments in Europa Højt Udbytte, Metso has a strong position.
"Metso is performing well, although it is a cyclical company whose results fluctuate with market conditions.But global mega trends will spur the company's long-term growth and prospects are fine," says Peter Nielsen.He emphasises, however, that the company must be expected to suffer some decline in its order book due to the eurozone crisis and the current slowdown.
In this day and age, the price of and demand for commodities is inextricably linked to China's economic growth.Growing affluence in China fuels increased demand for commodities as the Chinese start demanding washing machines and cars, and the country's infrastructure expansion also requires commodities.In general, copper and metal prices are closely linked to China's strong demand.This means that companies in the commodities industry stand to benefit from continued Chinese growth.
China has tightened economic policy
Bo Bejstrup Christensen, Chief Analyst at Danske Invest, says that China's medium-term prospects are sound:
"For many years, China has provided an exciting growth story with annual growth rates averaging 10 per cent.But in 2008, the country suffered an external shock sparked by the Western financial crisis.This coincided with major economic tightening by the Chinese authorities earlier that year in a bid to curb rising inflation.When the global recession was a reality, the Chinese authorities opened the floodgates and Chinese growth surged, driven by investment in infrastructure and residential construction.The result was renewed pressure on inflation and skyrocketing housing prices.To avoid overheating, the Chinese authorities had to tighten the economic reins again.This now seems to be bearing fruit with falling inflation and stable housing prices.But the Chinese authorities should be cautious not to ease economic policy too much if they do not want to unleash a fresh bout of inflation.If prudent economic policies are pursued, we expect China to realise growth of 7-8 per cent over the coming years," says Bo Bejstrup Christensen.
He does emphasise, however, that uncertainties still surround Chinese growth; if Europe is trapped in a deep recession, this will also impact China's exports, among other things, putting growth under pressure.
