Has the Bull Left China's Shop?

Are commodity prices about to fall due to events in China? Will slowing demand in some sectors of the Chinese economy coupled with the development of its own production facilities cause excess world capacity for important raw materials such as steel?

From accelerator to brake, The Economist: Nowhere has China's growing economic influence been felt more powerfully than in the world's commodity markets. The country's enormous appetite for base metals, minerals and fuels has pushed their prices to new highs and created record profits ... However, ... As the Chinese authorities have attempted to cool overheated parts of their economy, from construction to cars, consumption of some commodities has slowed sharply or even fallen. ... Chinese demand for oil has been just 2% higher so far this year ... demand for cement has been flat; and that for aluminium has declined by 5%. Analysts had been expecting growth ... Slowing demand has hit prices. It is also turning China into a net exporter of some of the materials for which it has until lately been scouring the globe. ... The extent and duration of China's weakening demand for commodities is hotly debated. ... Demand for some commodities looks as strong as ever. One is coal, ... Copper prices keep hitting record highs: China, which consumes a fifth of the world's supply, ... increased its imports by more than 12% in the first eight months of the year. Uranium, for use in nuclear power stations, is also still in demand.

...[There are] doubts a construction upturn could drive the annual growth of import volumes back to 35-40% ... Import growth ... will be constrained by slowing investment in fixed assets for heavy industries and by the excess capacity built up in the past three years. This excess capacity is the main reason to expect more weakness in the mainland's demand for several commodities and hence in world prices. China's huge investment in production facilities for basic metals and materials increasingly will allow the country not only to satisfy its own demands but also to let any overflow wash into world markets.

Steel is the prime example (see chart). The capacity of China's 260-odd steelmakers could ... by the end of 2005 [be] up by 23% year on year ... At a steel conference ..., Nicholas Lardy, of the Institute for International Economics in Washington, DC, pointed to “massive, massive excess capacity” in China at a time when steelmakers elsewhere are curbing production growth. In aluminium, 20% of new smelter capacity in China is lying idle because of a lack of raw materials. Once that comes on ... supply could outstrip demand growth over the next two years—even though demand will be rising at a double-digit pace...

All of this will cause political headaches for the Chinese as well as economic upset for their trading partners. Until now, China's surging exports of manufactured goods have at least partly been balanced by its strong imports of raw materials. If it now starts to export commodities and basic goods as well, trade tensions can only worsen. ... Whether China's government will manage to consolidate the sector to this extent is questionable, given the strength of vested local interests. But that is not the point. ... Both China and the rest of the world will find an end to the long commodities boom hard to handle.

I understand why I should be concerned if central planning or some other inefficiency in China is causing excess capacity and affecting world markets for steel and other commodities. But that is not the argument. I don't understand why I should be concerned with an outward shift in the world supply of commodities resulting in lower prices for key inputs to production. Why is that a problem?

Comments

[anne]

"I don't understand why I should be concerned with an outward shift in the world supply of commodities resulting in lower prices for key inputs to production. Why is that a problem?"

Well, I guess it is not a problem then :) The Economist looks at China from a curious frame, so I allow for this. Nice comment.

[Claus Vistesen]

Has the Bull Left China's Shop?

No it has not, and I don't think that will happen in the near future. The Economist analysis is a bit weird in my opinion; it is as if the article struggles to create a problem that is not there. If China begins to export cheap commodities the China bashing in the WTO will probably begin again but that is hardly new stuff. The main point in the article seems to be that slowing Chinese demand is a problem for the world economy which is probably true, but Chinese demand is not slowing eh?!

[anne]

Claus Vistesen

"Has the Bull Left China's Shop?

"No it has not, and I don't think that will happen in the near future. The Economist analysis is a bit weird in my opinion; it is as if the article struggles to create a problem that is not there."

Precisely. The Economist would do well to look at China as other than a regretted lost imperial opportunity :)

[spencer]

If you break this down by commodity you get very different results. The analysis that China will generate an increase in the world steel supply is
correct, but don't expect China to increase the world supply of copper or oil.

[spencer]

If you break this down by commodity you get very different results. The analysis that China will generate an increase in the world steel supply is
correct, but don't expect China to increase the world supply of copper or oil.