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

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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

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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

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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

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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

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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

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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

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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

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China’s Share of Foreign Investment

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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

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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

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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 China

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