Download China and Commodity Markets

NS4301
Summer 2015
China and Commodity Prices
Overvivew
Elizabeth Economy and Michael Levi, “China by all Means
Necessary”, CFR, July 3, 2015
• As Chinese economy experiences a slow-down and
commodities prices are falling article looks at:
• How Chinese demand and imports drive global commodity
prices
• The broader implications of the Chinese slowdown for the global
economy and security and
• The consequences for Africa’s resource producing states
2
China and Resource Markets I
• China’s rise fueled by every-rising consumption of
natural resources leading to large-scale imports
• In 2014 China consumed more than 50% of the world’s:
• coal, aluminum, and nickel
• More than 40% of the world’s
• copper, and zinc
• Roughly 30% of the world’s
• Soybeans
• Now China’s growth experiencing marked decline from
10.6% in 2010 to what Chinese leadership calls the “new
normal.”
• Projected growth of 7% in 2015 with many experts feeling
this will be hard to obtain
3
China and Resource Markets II
• Current slowdown raises questions bout China’s future
role as
• a dominant actor in global commodity markets and
• a source of new investment in natural resource extraction
• As prices for any number of commodities fall, essential to
understand how Chinese demand and imports drive
global commodity prices
• Easy to assume that China’s slowdown responsible for
much of the commodity price decline
• Just as China’s rapid expansion in the 2000s was
responsible for the commodity super-cycle
• Fact is China far from the only factor in commodity prices
4
China and Resource Markets III
• In 2014 China imported more crude oil, copper and
soybeans than it did in 2013 even as prices for all those
commodities fell
• Only coal experienced both lower prices and a lower level
of Chinese imports
• In some cases more supply has come on line
• US good grain harvest
• Bumper crops in soybeans, corn and wheat have led to a more
than 30%, 22% and 16% drop in prices
• In other cases combination factors has contributed to
strong supply and falling prices
• U.S. shale boom
• Saudi Arabia decision not to cut supply
• Lead to a fall in oil prices
5
China and Resource Markets IV
• Still Chinese demand does play a major role in driving
the price of commodities
• Traditionally Chinese demand for many commodities has been
generated by its drive to develop its infrastructure
• Now China’s leaders attempting to move away from
investment-led growth to a consumption based economy
• Means the pace of growth in demand for some commodities like
iron ore will diminish
• Ongoing slump in China’s housing market and slowdown
in new housing starts are also likely to dampen demand
• Efforts to deal with pollution and meet climate change
pledges may contribute do declining levels of coal
consumption – but increase demand for natural gas
6
China and Resource Markets V
• Most likely the structural shift in Chinese economy will be
evolutionary rather than revolutionary
• Likely some commodities will remain in high and growing
demand from China
• Chinese leadership continues to place a priority on new
infrastructure development – airports, railroads, nuclear
and hydropower plants
• Massive expansion in China’s electricity grid will sustain
copper demand
• Metals such as nickel found in many higher end
consumer goods – automobiles should be firm as
Chinese middle class expands
7
China and Resource Markets VI
• China also plans to stockpile resources – will keep
demand stronger than it otherwise would
• Plan spending $24.7 billion in 2015 to increase stockpile
of grains, -- 33% increase from 2014 levels
• Also problems in China’s agriculture sector persist
• means increased imports and Chinese purchases of Land
overseas
• Soybean production at a 23 year low
• China’s role as a source of significant investment in
natural resource extraction also evolving
• Have been one of the world’s most active new investors in
resources over last decade
• Many investments others felt were to risky
8
China and Resource Markets VII
• Evidence Chinese companies and state investment funds
becoming more cautious about investing in natural
resource sector
• Chinese officials admit that their overseas investments in
natural resources have often encountered economic and
political difficulties
• In 2013 80% of china’s overseas mining deals were money
losers
• China has typically been paying 20% more for oil and gas
assets than industry average
• Also many senior officials in energy and oil have been
swept up in current anti-corruption campaign
9
China’s Share of Foreign Investment
10
China and Resource Markets VIII
• A lack of well-developed corporate social responsibility
has also contributed to political problems for Chinese
companies
• Both state and private companies have faced popular
discontent as countries such as Ghana and Zambia
complain of poor environmental, labor and corporate
governance practices
• Economic and political challenges mean
• Chinese state-backed investment overseas evolving from
singular focus on commodity-related industries to one
that highlights technology companies and real estate
holdings
11
China and Resource Markets IX
• Even as overall Chinese annual FDI increased from $68
billion in 2011 to over $100 billion in 2014
• China’s investments in metals and energy in 2014 dropped to
$35 billion from over $50 billion in previous three ears
• Real estate has more than doubled and technology
investments have growth tenfold
• If such a strategy continues, many resource rich
countries will find themselves seeking other partners for
relatively high risk low return investments Chinese have
undertaken over past decade or more
12
China and Resource Markets X
• China’s changing resource needs and investment
strategy may create economic stress in some resource
rich countries
• Offsetting this is China’s new vision for developing the
financing for a network of regional and even global
infrastructure projects
• China’s “one belt, one road” plan includes vast array of
infrastructure and energy projects throughout south,
central and southeast Asia extending through the Middle
East, Africa and Europe
• Will finance much out of the new Asian infrastructure
investment Bank (AIIB)
• If successful China’s regional infrastructure plan and
AIIB to support economic growth will support rising
demand for commodities even if end consumer is not
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China