ANZ launches demand-driven China commodity index

MELBOURNE (Reuters): Australia and New Zealand Banking Group has launched an index for clients to track Chinese commodities demand, which it said was a better gauge of global commodity markets than other indices that were too focused on Western markets.

The ANZ index tracks Chinese domestic prices of 22 commodities, including iron ore, coal and rice, which are not included in other international commodities indices, and is weighted on consumption rather than production.

ANZ’s head of global head of commodity research, Mark Pervan, said other indices failed to reflect the fact that China now makes up about half of global consumption of key products and left out key commodities such as iron ore, which now have market-based prices.

“The commodities market has changed so much in the last 10 years, but traditional indices haven’t, so we wanted to get ahead of that,” Pervan said on Thursday.

ANZ said its index so far appeared to be a good predictor of China’s Producer Price Index and industrial production, leading those by one to two months, and was the only global commodity index to correctly track a fall in China’s Purchasing Manager’s Index in the fourth quarter of 2011.

“We’re finding that the index, not surprisingly, tracks nicely the inflation-based indicators in China, particularly the Producer Price Index,” Pervan told reporters on a conference call.

The widely followed Thomson Reuters-Jefferies CRB index <.CRB> is skewed towards US markets, driven by energy and soft commodities with no iron ore and coal. In contrast, ANZ’s China Commodity Index gives thermal coal a 16.6 per cent weighting, iron ore 11.2 per cent and coking coal a 9.8 per cent weighting.

The index was possible now that iron ore and coal were traded more on market-based pricing, rather than annual pricing, Pervan said, adding it was unlikely that iron ore producers would revert to annual pricing, as urged by some steel mills.

“They’re not prepared to move back,” Pervan said.

He said he expected iron ore prices to remain around $135 to $140 a metric ton (1.1023 ton) in the short term, then move into the $140 to $150 range in the fourth quarter, based on a pick-up in Chinese demand, assuming lower interest rates and cuts in bank reserve requirements started to boost the economy.