CHINA, INDIA, COMMODITY PRICES AND THE TERMS OF TRADE

Raphael Kaplinsky

Development Policy and Practice,

The Open University

Alf Maizels Memorial Workshop, 18-19th Sept 2008

China’s growth is not unique..

Growth of exports

0123456

1 6 11 16 21 26 31 36 41Years from beginning of export surge

Lo

g o

f e

xp

ort

gro

wth

China (1989-2003) Japan (1960-2003) Korea (1963-2003)

GDP (constant prices)

1.5

2

2.5

3

3.5

1 6 11 16 21 26 31 36 41

Years from beginning of growth surge

Lo

g o

f G

DP

gro

wth

China (1989-2003) Japan (1960-2003)

Korea (1963-2003)

Share of Global Population

0

5

10

15

20

25

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004

China India J apan Korea, Rep.

Distribution of MVA

   

Share of the World

 Share of

developing countries

By Income 1985 1995 2005 1985 1995 2005

S. and E. Asia 4.1 12.9 19.7 29.2 59.5 69.4

of which: China 1.4 5.1 9.8 10.2 23.6 34.7

Latin America 6.7 6.9 6.4 46.9 31.5 22.6

Sub-Saharan Africa 1.0 0.3 0.3 7.1 1.3 1.0

China’s share of growth in global demand

Source IMF WEO, Sept 06

Kgs/capita Aluminium Copper Steel

GDP per capita ($US1995)

Japan 1955 1975

0.6

10.5

1.2 7.4

80

599

5,559

21,869 Korea 1975 1995

1.0

15.0

1.3 8.1

84

827

2,891

10,841 China 1990 1999 2002 2003

0.7 2.3 3.3 4.0

0.6 1.2 2.0 2.4

59

108 160 200

342 756 933

1,103

Source: Macquarie Metals and Mining, personal communication (2004

Copper mine production gains and losses

• Global mine production has underperformed plans for the past six years, and has massively below plan over the past three years.

• We have already lost close to 300,000t of planned production so far this year, and at this rate, total losses this year could be even bigger than last year.

Source: Brook Hunt, Macquarie Research, September 2008

Copper mine losses versus plan

-895

-662

-862

-1079

-349-457

-139

-36

-329

-185

237276

32

253196218

-1200

-1000

-800

-600

-400

-200

0

200

400

1993 1995 1997 1999 2001 2003 2005 2007

'000t

Forecast Additional Loss

Actual Loss

Source: Jim Lennpn, Macquarrie research, personal communication

Reasons for delays• Mines are being pushed to their limits … leading to a higher

frequency of equipment failures as well as pit wall stability issues

• Trend towards larger equipment replacing numerous small units means equipment downtime affects a higher percentage of production

• With equipment and consumables demand exceeding supply, replacement lead times have been greatly extended

• New projects are having to compromise on equipment quality in order to meet start up deadlines (e.g. use of Russian & Chinese tyres, etc)

• There is a shortage of skilled and qualified mine workers • A new breed of very investor (i.e. hedge funds) now demands

high investment returns, leading to overly optimistic company production forecasts (for both existing operations and projects) in order to attract these investors

• Substantially higher by-product metals prices have tempted miners (particularly in the US and Chile) to high-grade specific areas of their ore bodies, often at the expense of copper

Source: Jim Lennpn, Macquarrie research, personal communication

Summary of reasons for 2007 losses

Optimistic Forecasts14%

Technical Problems20%

Strikes20%

Pit Problems8%

Grade11%

Weather4%

Slow Ramp Up21%

Other2%

(Kazakhmys, Norilsk, Ray, Rapu Rapu, Robinson)

(Ok Tedi, Olympic Dam, Kazakhmys)

(Cananea, Codelco)

(Chuqui, Dzhezkazgan)

(Cerro Verde, Spence,Morenci, Milpillas,Frontier, Chapada

Minto, Kamoto)

(KCM, Mopani)

(Alumbrera, Antamina)

(Bwana, Lonshi)

Source: Brook Hunt, September 2008

Source: Jim Lennpn, Macquarrie research, personal communication

China’s share of growth in global demand

Source IMF WEO, Sept 06

Monthly average spot price of six key metals at the LME (1998 – June 2008)

0

100

200

300

400

500

600

700

800

900

1000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1998

= 1

00

Aluminum Copper Lead Nickel Tin

Source: IMF Commodities Price Bulletin

China, India share of global imports

Coal Oil China India US EU 25 China India US EU 25

1984 0.4 0.2 1.0 45.1 0.0 1.5 19.0 40.9 1990 0.3 1.9 1.5 42.5 0.4 2.0 21.5 37.4 2000 0.3 4.6 3.8 32.7 3.5 2.9 22.3 30.6 2001 0.3 4.1 4.1 36.2 3.3 2.9 21.7 30.8 2004 1.6 5.1 4.9 34.4 5.4 3.6 22.5 30.5 2006 2.4 6.8 4.4 33.4 6.0 3.8 21.6 30.6

COMTRADE accessed via WITS on 5th Sept 2008

Index of oil and coal prices, 1980-2008 (2000=100)

Source: IMF World Economic Outlook

World Manufacturing Export Price, 1986-2000

-10

-5

0

5

10

15

20

25

An

nu

al

pri

ce

ch

an

ge

(%

)

IMF, World Economic Outlook Database

EU Imports from China

1st Q 2005/1st Q 2004 China Market Share in EU-25 Imports

Volumes % Price % 1 Q 2004 % 1 Q 2005 %

T-shirts 164 -26 7 17

Pullovers 534 -47 6 38

Men’s trousers 413 -16 6 35

Blouses 186 -24 6 22

Women’s coats 184 -18 6 10

Bras 139 -15 30 49

Socks and pantyhose

63 -22 30 54

Linen and ramie yarns

51 1 27 45

Linen fabrics 257 1 10 45

Source: Euratex data as reported by Nathan Associates

% of sectors with negative price trends, 1988/9-2000/2001

25.629.7

18.3 17.2

8.5

0

5

10

15

20

25

30

35

Low income China Lower-middleincome

Upper-middle-income

High income

% o

f se

cto

rs

Countries or sectors?

• Prebisch, Singer, Lewis and labour markets

• Singer revisits Schumpeterian rents (1971,1986, 1991)

• Maizels et al:

–EU (1979-1994)

–US (1981-1997)–Japan (1981-2000)

A structural shift?

• The Asian Driver effect will be sustained in all three sets of commodities

• Schumpeterian rents will continue to be eroded in manufactures

C 1970 1990 2000 Share of gross global R&D ($US PPP) (%)

2.0 10.2 21.0

Coverage

Excluding centrally planned

economies

Including formerly centrally planned economies

A structural shift?

• The Asian Driver effect will be sustained in all three sets of commodities

• Schumpeterian rents will continue to be eroded in manufactures

• Historical divides will remain stronger in services

• Commodity prices may fall in the coming years, but the terms of trade are about relative prices

Number of countries accounting for 90% of SSA Exports (excl SA)

0

5

10

15

20

25

Agricultural Materials Ore and Metals Fuels

SSA EXPORTS

SSA IMPORTS

CHINA IMPORTS

CHINAEXPORTS

SSA GAIN

SSA GAINSSA LOSS

SSA LOSS

Clothingfootwear

Hard commodities

Clothingfootwear

Oil All SSA

SA, Lesotho, Swaziland,

Madagascar,Kenya, Mauritius

Most SSA

Oil exporters, Zambia, SA, DRC, Botswana, Ghana, Gabon, etc