OREANDA-NEWS. January 03, 2014. China's commodity demand has been lumpy this year, with weakness in crude oil and copper being offset by robust gains in iron ore and coal, and this pattern is likely to continue into next year.

However, the relative winners may change. Much will depend on the track of economic reforms and how much success the world's largest commodity user has in rotating its economy to be more consumer-led.

China's official target for gross domestic product growth was 7.5 percent for 2013, and while the target for next year has not yet been announced, it's likely to be maintained or perhaps lowered slightly.

But more important than the overall target for GDP is how the growth is achieved.

The pattern for the past two years has been that China's economy has seen momentum losses in the key industrial sector, followed by a re-acceleration in growth as policies are implemented to boost infrastructure and construction investment.

This is clearly a pattern the authorities would like to move away from, but to achieve a more consumer-driven economy without sacrificing growth rates is proving tough to achieve.

Nonetheless, the most likely policy path for 2014 is to continue efforts to move away from investment-led growth, albeit at a modest pace.

This means the recent trend of slowing demand growth for commodities is likely to continue.

However, lower growth rates still mean significant volume gains given the higher starting points after years of strong demand.

Crude oil may experience a turnaround in demand growth in 2014, based on the view that manufacturing and exports will remain solid and consumer spending on new vehicles will be robust.

China may have overtaken the United States as the largest net importer of crude oil and refined fuels this year, but the overall growth in demand was below market expectations.

With only December's figures to come, implied oil demand for the first 11 months of 2013 was 9.76 million barrels per day (bpd), a gain of only 2.1 percent over the same period in 2012.

Even strong December oil demand won't be enough to meet the International Energy Agency's forecast for demand of 10.19 million bpd for 2013, nor the 10.28 million bpd predicted by top state oil company CNPC at the start of the year.

Oil demand may be boosted by strong gains in vehicle sales, with year-to-date purchases rising 13.5 percent in November over the same period last year, almost double the 7 percent forecast for 2013 sales growth made in January by the Chinese Association of Automobile Manufacturers.

Crude imports will also be boosted by new refining units. However, some of this oil is likely to end up being exported as refined products given domestic capacity is still well ahead of demand.

IRON ORE STRENGTH WANING?

Iron ore has been the standout commodity import for 2013, defying predictions of lower prices amid an oversupply of steel, but it may struggle to repeat the performance in 2014.

Year-to-date imports were up 10.9 percent to 746.1 million tonnes in November, putting China on track for 2013 imports of more than 800 million tonnes.

While this may rise to 850 million tonnes in 2014, it would be a slowing of growth to around 6 percent.

Iron ore prices may also struggle as next year is likely to see supply rise faster than demand, although it does seem that the big three producers, Vale, Rio Tinto and BHP Billiton, won't necessarily use all their extra capacity.

Coal imports have also been robust, rising almost 19 percent in the first 10 months of the year to 216.2 million tonnes.

However, this has largely been achieved because of weak global prices rather than large gains in Chinese demand.

China is keen to use less coal in order to curb pollution, but demand is still likely to grow, even if it does grow at a slower rate compared to prior years and relative to growth for other fuels such as natural gas and nuclear.

It remains to be seen what policies will be implemented, and enforced, to discourage coal use, or increase the use of higher quality coal at the expense of low-rank supplies.

Whether imports can maintain growth will be driven by policy decisions and whether international prices remain competitive with domestic supplies.

For 2014, it appears that once again the best that coal suppliers such as Australia and Indonesia can hope for is solid gains in volumes, while prices will likely remain muted.

The other policy area that may affect commodities is financial liberalisation.

China has made it clear it wants more pricing power over the commodities it buys, and has encouraged the development of futures contracts for iron ore and coal.

But for these to become accepted benchmarks, China will have to liberalise financial markets to allow full participation by foreign players.

So far, China has just started down this path, but once trends start they tend to gather momentum.

The key for China's commodity demand next year is to watch policy developments closely to see if the broader trends are moving to reality quickly or slowly.