Transcript 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
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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
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
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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
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China