China Commodities Super-Cycle’s End: Not As It Was In The Past

As we asked last week, will China be the driver of commodities demand it was in the last decade?

The process of urbanization, in which hundreds of millions have moved to cities from the countryside, has been a big driver of the commodities super-cycle in the past ten years, particularly for materials like iron ore, steel and cement, but also copper and aluminum.

The pace of migration, though, has begun to level off and the FT quotes Macquarie Bank, which forecast that China’s steel demand could peak between 2020 and 2025.

China’s steel demand growth is already slowing, from double-digit rates for the last decade to 4 percent estimated growth this year. Growth is projected to remain in the single digits.

Commodities such as copper and aluminum, however, can be expected to plateau later in the cycle – when per-capita GDP hits around $35,000, suggesting that some base metals prices could still see some upside in coming years.

Finally, demand for oil, electricity and food commodities is likely to continue climbing, not peaking until the Chinese economy reaches developed status. The size of the Chinese population means that energy consumption will continue rising for years to come, even if at a slower pace.

Interestingly, the FT quotes some rough numbers to support the point. Even after the rapid increase in demand of the past decade, Chinese oil consumption per capita, at less than 3 barrels of oil per year, still remains small compared to Brazil’s nearly 6 barrels per year and way below the 25 barrels per year of the US. Thrifty European citizens consume roughly 12 barrels per year.

Demand for food commodities will continue to rise. As the Chinese become richer, they tend to consume less rice and start eating more expensive products such as meat and fruit, placing demands on the world’s supply of corn, for example. Where China used to be self-sufficient, the country now imports corn and per capita consumption of rice has started to fall.

So even when Europe solves its economic woes (and there will be spikes of volatility as solutions are found only for them to fail) and the Americans continue their path of growth, the largest catalyst for the commodities super-cycle is unlikely to create the demand it did in the last decade. Indeed, Beijing has given recognition that it is not in the country’s best interest to return to that level of growth.

The future of the super-cycle is therefore likely to be less “super” and hopefully more gradual. The significantly higher cost of production for many commodities means that a return to prices in the early part of the last decade would be unsustainable, so current prices — where most producers for most products turn a modest profit — could become the new normal.

Not all commodities will face the same demand and supply issues, so one size does not fit all; for the metals markets, the coming decade will see rising demand — but to paraphrase Scottie: “Not as we have known it.”

By Stuart Burns