Tuesday, August 25, 2015

How Significant is China's Consumption of the World's Commodities?

A great deal of the recent volatility in the stock market has been attributed to China and its slowing economy.  China is one of the world's largest economies and its consumption of commodities since it joined the World Trade Organization in December 2001 has led to a bull market in commodities, particularly metals and hydrocarbons.  Since China consumes such a significant portion of the world's economies, when China sneezes, the economies of other nations catch a cold.  This is particularly the case for Canada and Australia since their economies are based on the production of commodities.

According to the World Bank, here is what has happened to the prices of the three main groups of commodities since January 2011:

Here is what has happened to the prices of those three commodity groups since 1980:

This graph quite clearly shows us the rise in all three commodity groups during the early 2000s as China started to flex its economic muscle.

In 2015, the World Bank expects non-energy commodity prices to fall 12 percent with metals falling 17 percent due to capacity increases as new mines come on stream and as demand from China slows. The largest decline in non-energy commodities is expected in iron ore which will experience a price decline of 46 percent as new low-cost mining capacity comes on stream in Australia.  Energy prices are projected to be 39 percent below 2014 levels with declines in natural gas prices in all three main markets in the United States, Europe and Asia.  As well, coal prices are expected to fall by 17 percent on a year-over-year basis due to surplus supply and weak demand.  Agricultural commodity prices are expected to decline 11 percent in 2015, particularly in edible oils and meals.  The drop is prices of agricultural commodities is largely due to ample harvests in North America which have led to rising stocks.

Now, let's look at how important China is to the world's commodity markets.

Between 2001 - 2002 and 2011 - 2012, China's consumption of key commodities and their share of the world's consumption (in 2011 - 2012) rose as follows:

Over the years between 2001 and 2012, China's industrial production grew by 298.3 percent and its GDP rose by 171.6 percent.  In 2012, China had 19.2 percent of the world's total population, was responsible for 10 percent of the world's GDP and 19.1 percent of the world's total industrial production.

Here is a graph showing how China's primary energy consumption rose at a far faster rate than the rest of the world between 1975 and 2014:

Here is a graph showing how the growth in China's coal consumption far outstripped the rest of the world:

All of the world's increase in consumption for coal is due to increased demand from China and India; in 2014, China consumed half of the world's coal, up from less than one-third in 2000.

Here is a graph showing how the growth in China's metals consumption (aluminum, copper, lead, nickel, tin and zinc) also far outstripped the rest of the world:

China's share of world metals consumption tripled from 13 percent in 2000 to 47 percent in 2014.

Interestingly, if we look at the growth in consumption of both edible oils and grains, China's demand growth is about the same as the rest of the world:

Here is a summary graphic showing how China's consumption of key commodities as a percent of the world's total has changed between 1990 - 1994 and 2010 - 2014:

Interestingly, as we can see on this graphic, China's per capita metals consumption has grown over the last two decades to become among the highest in the world:

It is quite clear that a slowing in the growth rate of China's economy will have a significant impact on commodity prices, particularly metals and energy/coal.  China's growing demand for commodities is largely what inflated the commodity bull market of the mid-2000s to the middle of 2014 and it is its dropping demand that will deflate the commodity bubble that developed.

1 comment:

  1. you mentioned Canada and Australia...who else?

    it would be interesting to see a breakout of the countries that produce or export those same commodity groups...