China’s Consumption Doesn’t Ensure a Continued Commodity Bull Market

Map of ChinaThe market has knocked the stuffing out of many commodities of late. Crude oil is down 35% from its record high of $78.40 in July to a 19-month low as I write. The CRB Index of 19 commodities is off about 20% since May. The only commodities holding up seem to be in the agricultural markets (e.g., corn).

The key piece to understanding the commodity jigsaw puzzle lies in that ever-baffling and wondrous place, China, which never seems to stray far from our view. What happens there has a huge impact on commodities worldwide.

China is already the world’s largest consumer of copper, nickel and zinc. It is among the largest consumers of many other commodities, as well. But what’s really amazing is not so much the sheer quantity of commodities devoured… what is really staggering is the growth rate of such consumption – especially in the context of what the rest of the world is doing.

For example, from 2002-05, according to the International Monetary Fund, China alone accounted for 48% of the increased demand for aluminum. Take a look at the short table below, which shows the percentages for some other commodities, as well:

  • Aluminum, 48%
  • Copper, 51%
  • Lead, 110%
  • Nickel, 87%
  • Steel, 54%
  • Tin, 86%
  • Zinc, 113%
  • Oil, 30%

Think about that. Worldwide, when you look at the increased consumption of, say, steel, 54% of that increase came from China alone. In Wall Street fancy talk, they call that percentage the “commodity delta” – try dropping that in conversation at the next neighbourhood barbecue. For lead and zinc, China’s increased consumption actually offset declines in the rest of the world. No single country has been as important to the commodity bull market as has the Middle Kingdom.

I traveled to China in late 2005, spending time seeing the sights around dusty Beijing in the north, exploring the crowded streets of Shanghai and marveling at the busy panorama in Hangzhou and Hong Kong. I also stopped off at a small village between Shanghai and Hangzhou – called Wuzhen – where I ate chicken feet and pigeon soup and saw another side of China away from the big cities. All along the way, I met with Chinese professionals and business people who helped me gain a better understanding of what was happening on the ground in China.

The whole experience made a big impact on me. Ever since, I can’t seem to stop talking about China. With good reason, I think. The emergence of China’s economy on the world stage may be the biggest investment story of our time. In 1990, China was the world’s 10th largest economy. Today, it is the fourth largest. That’s mind-boggling growth.

The implications of that cover just about everything I’ve written about over the past 12 months – from strained water resources and bustling agricultural markets to aging infrastructure and needed energy investment. These are long-term trends that will take years to play out.

It would be a mistake to say increased demand from China alone assures a rise in commodity prices. There are always many variables, but China is unmistakably a big one. If China went away, it would be like a fat guy getting out of a hot tub. The water level would plunge. Let me put it this way: It’s hard to imagine a continued bull market in commodities without China.

It would also be a mistake to assume that China’s growth rate stays at its hot pace of recent years. “Only stand high a long enough time,” the poet Robinson Jeffers wrote, “your lightning will come; that is what blunts the peaks of the redwoods.” There is plenty of potential for lightning – social unrest within China, political tiffs with the U.S. and other policy mishaps. (I found it interesting that 27 separate pieces of anti-China trade legislation have made their way to Congress since 2005.)

However, even a slower-growing China will still have a lot of sway in the market for commodities. China is still in the early innings of industrialization. It’s in the midst of a massive shift of population to the cities, the biggest the world has ever seen. Chinese officials expect more than 300 million Chinese farmers will migrate from rural areas to live in urban areas in the coming two decades.

As a result, China has big plans for investment in infrastructure – such as water and wastewater systems, power grids and much more. China will need a lot of steel, copper, energy, etc., to build all that stuff. For example, as Stephen Roach at Morgan Stanley notes, “There is an especially tight link between homebuilding and copper.” In the U.S., the average home contains 400 pounds of copper. We don’t have comparable numbers for China, but it seems reasonable to assume China’s numbers should be similar. It’s possible, given that Chinese efficiency lags behind the U.S.’s, that China could require much more.

Nonetheless, we should expect commodity prices to fluctuate, sometimes sharply. Even in the last great commodities boom, from 1966-82, there were plenty of setbacks. And these commodities won’t all move together as each responds to the unique tugs and pulls of its market. We’re seeing some of this already with corn rallying hard amid a nasty decline in oil.


Chris Mayer
for Markets and Money

Chris Mayer
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Daily Article series to here in Markets and Money. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.

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4 Comments on "China’s Consumption Doesn’t Ensure a Continued Commodity Bull Market"

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Ralph Petrillo
Interesting to note that in the last ten years of economic expansion, commodities have been in demand. This is due to the fact that many Western nations desire to manufacture in China to take advantage of lower wages and benefits. However, there is a zero sum game. For if less maufacturing is occuring in Noth America, the demand for raw materials is actually declining in the Northeast. The Iraqi war has stimulated the U.S economy with short term government financing in U.S. of job market. When Iraqi war settles down, and surplus of oil from Iraq htis the market in… Read more »
Many economists like to treat the whole commodity group as one. I think that is a wrong way to look at commodities. Different commodities, ie base metals, have different supply and demand situations. Aluminum inventory is in abundance, China is producing huge amount of aluminum every year, there will not be any shortage of aluminum in the near term. Whereas lead and tin supply are so little, any supply disruption (which is happening to tin and lead now) will push their prices to a much higher level. Copper has become a gambling pawn for hedge funds, rather than an investment… Read more »
peter kups (reallist)
peter kups (reallist)

what a cabbage !!

peter kups (reallist)
peter kups (reallist)

ralph has no idea where gold and silver are heading!!

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