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S&P Concerned Over Possible Commodity Bubble

S&P Concerned Over Possible Commodity Markets Bubble And Chinese Economy Slowdown

(Kitco News) --New York (Kitco News)--China's significant presence in the commodities markets raises the specter of an unsustainable bubble and a slowdown in the country's growth could cause distress in the sector, according to a report from Standard & Poor’s Rating Services released Thursday.

China is one of the leading consumers of a broad range of commodities, according to analyst Scott Sprinzen in a report, "The Potential Risk Of China's Large and Growing Presence in Commodities Markets." The report was published on S&P's RatingsDirect.

"Among emerging economies, we believe China--given the contribution of the size of its economy and the steep slope of its growth trajectory--has had a far more significant role in driving appreciation of the commodities prices than any other country," Sprinzen said.

The report said that commodities prices were at or near record levels earlier this year and the prices have subsided only modestly. Because of this, "Standard & Poor’s is naturally concerned that the current situation represents an unsustainable bubble, subject to a sudden correction."

S&P said that market bubbles inevitably burst. "And if current market conditions in commodities do represent a bubble, a significant deceleration or downturn in China and other emerging economies could ultimately cause the rupture,” the report said.

"Indeed, the modest subsidence of prices over the past two months is partly attributable to market expectations of slower growth in China," Sprinzen said.

Standard & Poor’s expects that China will sustain high growth rates over the next few years, if not as high as in the recent past.

"We also recognize that China's growth could slow more markedly at some point," Sprinzen said. "We believe that any sudden and severe economic deceleration in China would cause distress in the commodities markets, forcing prices downward and leaving companies with excess supply and production capacity that the more-developed economies couldn't pick up."

By Terry Wooten, of Kitco News