London (Platts)--12Dec2012/852 am EST/1352 GMT

China is likely to remain the major factor driving the direction of commodity markets in 2013, analysts at UK-based Wood Mackenzie said in a new report published Wednesday.

Energy and metal markets will also be affected by slower growth in other emerging markets and economic problems in the developed world, it said in the Horizons 2013 report.

"China remains the key swing driver for global commodity prices," Woodmac said, pointing to the fact that while Europe continues its "recession recovery," demand for energy there has fallen.

"Navigating the next 12 months without incident will be challenging, and there is little chance of events in Europe sparking a resurgence in global energy demand," it said.

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Woodmac said that China's economy is slowing, and 2013 will determine if this is a successfully managed transition to a new phase of development.

The investment-driven boom of China's last decade is moving from the prosperous south and east of the country, towards the relatively undeveloped western interior.

"As cities and infrastructure are built in Hubei, Hunan and beyond, the economies of Beijing and Shanghai will rebalance towards the consumption-driven model of the developed world, implying a structural change in China's commodity demand," it said.

Chinese demand for energy will be key at a time when Europe's total energy demand has fallen 5% since 2008. This structural shift downward is permanent, Woodmac said.

"Final demand for energy [in Europe] will not return to pre-recession levels before 2030," it said.

It said that Europe is struggling to adapt to a new era of austerity and low demand, and falling trade is contributing to problems in emerging markets.

"China must prevent its economy from slowing too quickly, and the growth engines of India and Brazil are stalling. The acute threat posed by a Eurozone banking crisis has receded, but 2013 remains risky for Europe, and its impact on the rest of the world."

It said that with global growth so fragile, "a deep European recession would further damage emerging markets, derailing a nascent return to global energy demand growth."

UNCERTAINTY

Woodmac said geopolitics are also still a source of increasing tension, so that positive and negative price risks are finely balanced.

"Geopolitical risks are ever-present, and difficult to predict, but the febrile situation in the Middle East clearly presents upside, but likely shorter-term, risks to commodity prices."

"This period of price uncertainty is forcing divergent responses across energy and metals," it said.

Woodmac said oil and gas producers, however, seem resilient to the price uncertainty and are busy reloading their exploration and production budgets.

"The rapid transfer of improving technologies is reducing breakeven costs and unlocking reserves globally. But with growing supply, accessing and capturing demand is paramount."

Without an upside surprise to global demand, continued growth in unconventional oil and gas supply will push down commodity prices across the energy spectrum, it said.

The growth of unconventional oil and gas also promises to push North America towards energy independence.

Woodmac suggested that pipeline politics are key for 2013, dictating whether North American supply growth can be maintained, and how quickly the region will adopt a new, potentially disruptive role at the heart of global energy trade flows.

During 2013, decisions are expected on two oil pipeline projects, it said.

Keystone XL would transport Canadian oil sands to refineries on the US Gulf Coast, while the Northern Gateway would transport Canadian crude to the Pacific coast, to be shipped to markets in Asia.

"With falling domestic demand [in North America], increasing unconventional and oil sands production will back out crude imports. This will increase OPEC spare capacity, allowing for greater resilience against upward price shocks."

--Stuart Elliott, stuart_elliott@platts.com
--Edited by Jonathan Fox, jonathan_fox@platts.com

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