Will China Always Be Commodity-Hungry? Commodities from a Chinese Perspective


It is pretty much impossible to be a commodity trader or otherwise in the commodity business without having a firm grasp on “all things China” for the simple reason that Chinese demand has been the number one variable in the commodity equation for an extended period of time. Entire commodity-oriented business models have been built around China and it would be an understatement to simply call China dominant… “ubiquitous” would be a more precise term in our view.

But if the commodity dimension of the global economy lives by China, doesn’t it also risk dying by China?

To put it differently, is the worldwide commodity sector overly dependent on Chinese demand?

Unfortunately (from the perspective of sustainability), the answer to both of the previous question is a resounding yes, from a wide range of perspective:

  1. Commodity prices are directly dependent on Chinese demand and to a certain degree, the fact that China will continue to be a demand powerhouse has been priced in. What this means is that should a game-changing paradigm shift occur, a compelling case could be made that markets are anything but ready for this and that panic selling in one form or another will ensue
  2. This panic selling would not merely affect investors. Commodity-rich nations have for the most part made the mistake of becoming overly-dependent on revenue sent their way from China… think of it as a more incompetence-related form of Chinese demand being priced in. It is difficult to envision a panic selling scenario related to commodities which doesn’t result in many of the top commodity exporters becoming effectively insolvent due to insufficient export revenue coming in, unless of course a game-changing positive counter-force manifest itself to fill this gap, which isn’t amazingly likely in a commodity price crash scenario
  3. Aside from investors and sovereigns, entire multi-national industries would be disrupted to such a degree that contagion would be all but assured, a state of affairs which leads to… well, the elephant in the room, which is that a wrench would effectively be thrown into an over-leveraged worldwide economic system that is more vulnerable than meets the eye if we are to look at “indicators” such as US stock prices

These perspectives ultimately lead to an important question: if China stops being commodity-hungry, would this risk generating game-changing consequences when it comes to the global economy as a whole, perhaps even a financial calamity many experts consider long overdue (with history backing up their concern, in light of the fact that there has never been such a long time between recessions and while past performance does not guarantee future results, it is a data point worth considering)?

Once again, the answer is unfortunately affirmative in our view.

Simply put, the worldwide economy is so over-leveraged, vulnerable and dependent on “cheap” money being thrown around that multiple bubbles have been inflated, with each being more than capable of bringing down the financial system as we know it. In aggregate, due to the unprecedented nature of our problems, it is difficult to the point of impossible to determine what the consequences might end up being.

Finally, this discussion leads us to a logical question for anyone concerned about the commodity-related status quo, the question which constitutes the title of this article: will China always be commodity-hungry?

To better address the topic, it would perhaps be wise to split the topic into two distinct dimensions:

  1. China is a large nation, with a population in the roughly 1.4 billion zone and an economy that tends to be more infrastructure/construction-oriented than others. Infrastructure that needs to be maintained, occasionally modernized so as to conserve adequate functionality and so on. Therefore, it is quite difficult to envision a scenario in which China does not continue remaining commodity-hungry compared to other nations
  2. The second dimension, however, tends to be less optimistic and to address it, we would have to add a qualifier to the previously mentioned question: will China always be as commodity-hungry as in the present? The answer to this question is a lot closer to being negative, especially since pretty much all experts now understand that China has been switching to a different economic model and is essentially forced to continue maintaining this course. For this reason, it would be nothing short of reckless to assume that the commodity market can continue proverbially partying like it’s pre-2010 (to borrow a dot-com bubble reference). On the contrary, the rules of the game have changed and one of the price tags associated with the maturing Chinese economy unfortunately will most likely also pertain to commodity demand

As a bit of a conclusion, it is fairly safe to assume that the commodity landscape will continue changing, as it adapts to the new model(s) China is moving toward. Disruption is ultimately inevitable and yes, the consequences can be dire if the commodity market ends up experiencing an unexpected demand shock coming from the direction of China.

There is a silver lining, however, one represented by the fact that while impressive demand from China persisting tends to be priced into commodity prices, the market also has a chance to price in trend changes with respect to Chinese demand (including the slowdown dimension/component). As long as majorly disruptive black swan effects do not occur and the market has adequate time to adapt to new commodity-related realities, it wouldn’t be a stretch to assume that there will be a soft landing for this sector. As always, however, we urge caution and highly recommend having an optimistic outlook on life but being pessimistic when planning, with the ChinaFund.com team being at your disposal should you be in need of assistance with the latter.

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