How China drives commodities down

Citic Pacific Mining's Sino Iron magnetite iron ore project in the Pilbara region of Western Australia Australia has been profiting from Chinese demand for its raw materials

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Australia's resources minister, Martin Ferguson, has caused a stir with his assertion that the country's mining boom, one of the biggest drivers of its economic growth, is "over".

As he acknowledged, the state of the global economy has depressed demand for Australia's minerals and led to sagging commodity prices.

But those commodity prices have not just taken a tumble in Australia.

They have fallen globally, seemingly because Chinese economic growth has finally started to slow.

That is in part because European demand for its products has slowed. So China has started to produce less of those products, and needs smaller quantities of raw materials such as iron, copper, zinc and gold to do so.

Could Mr Ferguson's call on Australian commodities also be true for the global commodities market at large?

Exit the dragon

You know how you so frequently see "Made in China" stamped on the back of your toys, phones, in clothing labels, and on your food packets?

To make that volume of products that quietly dominate our lives, China has had to suck in a huge amount of the world's commodities.

According to the International Monetary Fund (IMF), in 2010, China consumed 40% of the world's base metals - aluminium, copper, lead, tin, zinc or nickel, all widely used in manufacturing the gadgets and goods we use every day - and 23% of the world supply of major agricultural crops like wheat and corn.

And to build the cities, roads, ports and factories needed to produce that stuff, China has staged a construction boom - upping its need for commodities even more.

But Chinese policymakers have decided it is time for their economy to move away from that.

Thomas Helbling, a research chief at the IMF, said that China's latest five-year plan for growth "strives to move the economy from investment- to consumption-driven growth".

In other words, it wants to stop pumping cash into importing commodities and building infrastructure, and focus on selling products and services to its growing middle class instead.

Changing it up

As China buys less raw material, the effect of its dominance becomes apparent and global prices are now going down.

A global slowdown?

Canada has recently started to see decreased demand from China, one of its biggest commodities customers, for its gold, copper, nickel and agricultural raw materials.

And Russia, heavily reliant on income from oil and gas exports - and now a member of the World Trade Organization (WTO) - may have a problem if China's slowdown means a permanent reduction in demand.

"The WTO is probably going to be dwarfed by what will happen to commodity prices in the wake of what's going on in China," said John-Paul Smith, head of emerging equity strategy at Deutsche Bank, speaking about Russian prospects.

"That's especially so if you take the view that China's economy is entering a structural, rather than a cyclical slowdown."

Brazilian investors, too, now want funds with no exposure to hard commodities.

They think commodity prices are moving into a permanently less frenzied state as China's economy matures.

Gilberto Nagai, head of Brazil equity investments at Brazilian banking group Itau, told Reuters news agency that "part of that is the view that China is morphing into a services-fuelled economy", which could lead to a decline in its commodities demand.

That is having an impact on economies as a whole, as Australia's Mr Ferguson suggested.

Australian mining giants recently disappointed the country's politicians. One, BHP Billiton, said it would put on hold its Olympic Dam extension project, reportedly worth as much as $30bn, which it was hoped would create 25,000 jobs in South Australia.

Some thought BHP Billiton's decision was evidence of China's change in growth expectations beginning to impact global demand, and other economies as a whole.

And having been protected from global recession by their mining boom, Australians do not want to hear that this is now under threat.

But BHP Billiton said it thought shrinking commodities demand would stabilise in 2013, including from China.

Ruchir Sharma, head of global emerging markets equity at Morgan Stanley, told the BBC that China's economy was simply maturing, but that resulting lower global commodity prices could be good for emerging markets.

"China is moving to a much lower growth trajectory," Said Mr Sharma.

"It is maturing, just as Japan did in the 1970s, [South] Korea in the 1980s and Taiwan's economy in the 1990s.

"It has become too large to grow that quickly, and it is becoming less commodity intensive."

Mr Sharma thought lower commodity prices would benefit a lot of developing countries such as Turkey and India, and even developed countries including the US.

And he added that the price of oil was more likely to fall than to keep rising, in his view.

"If China's slowdown is managed right, it will be OK," he said.

Supply and demand

One thing that has kept commodity prices high has been the lack of supply to meet a huge growth in demand.

The demand has been fuelled by China's stellar growth, as it has become a major producer of the mobile phones and cheap T-shirts we use daily.

Commodities businesses all over the world have grown quickly off the back of that demand, making investments in mines, oil exploration, and boosting soybean production in Brazil, among other things.

But those investments often take time to bear fruit.

So commodities companies such as BHP Billiton are now deciding that the reduced demand for their products from China make it harder to justify investing in those projects for the moment.

For example, Jim Rodgers, co-founder with George Soros of the Quantum Fund, told the BBC that a lack of farmers played a starring role in a recent spike in food prices - grain, corn and soybean being critical parts of the food supply chain.

"The main determinant to commodities is supply and demand," said Mr Rodgers. "We are running out of farmers because nobody has gone into agriculture for the past 30 years."

The US, France and Mexico have said they may convene an emergency meeting at the end of August to address the high price of grain.

But Mr Rodgers does not think commodity prices will decline.

"I don't see any significant new supply to bring this bull market to an end," he said.

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