Commodity bulls, look away now. Amid the broad-based nature of the near decade-long commodity bull run, both hard and soft, questions have inevitably been raised about its sustainability, particularly since Chinese demand has been its biggest driver.
So as China seeks to reduce investment spending while withdrawing fiscal and monetary stimuli, analysts at Credit Suisse asked the following question in a report released on Monday: will China’s mighty demand for commodities return in the medium term? The answer is an unambiguous ‘no’, for these reasons:
| The golden age of infrastructure investment is behind us now. The golden age of the housing boom is behind us now. The golden age of exports is behind us now. The golden age of policy stimulus is behind us now. but One more leg of urbanization is expected. Further acceleration in policy housing is likely. still Trend growth in the next decade is projected at 7% to 8% versus 10.7% in the past decade. Growth engines will likely shift from exports and infrastructure to consumption. which means It should take less commodity consumption for each unit of GDP. |
Base effects matter. Relative to the size of its GDP, China already is a mega-weight in commodity markets and demand per unit of GDP growth should inevitably tailor off from a high base, driven by a decade-long housing boom and infrastructure investment boom. For example, China uses nearly as much aluminium per capita as the US and Japan, despite having a much lower GDP per capita ratio.
Some numbers to mull over:
| From 2000 to 2010, China’s imports (in value terms) of iron ore surged by 42.5 times, thermal coal 248 times and copper 16.2 times. During the same period, its production (in quantity terms) for aluminium jumped by 441.8%, cement 219.5% and steel 396.0%. It is the biggest consumer in virtually all commodity categories in the world. China was the key factor behind the global commodity supercycle, in our view. |
In sum, the golden age of infrastructure investment is over, with China’s 12th five-year plan assuming a a 25% reduction in inflation-adjusted terms. Home ownership has already reached 67% in the urban sector – above the world average. However, housing prices are now outpacing average incomes since “the average person in China needs to spend ten years of salary to pay for an average apartment, versus the world’s average of about six year”. What’s more, as China transitions to become a more consumption-led economy, export growth is likely to be muted in the years ahead as China's competitiveness will be weakened given wage inflation and the appreciation of the renminbi.
China’s commodity super-cycle is over then, according to Credit Suisse. For a sense of its likely impact, here is the view from the steel industry:
| In 2011, it took 71 million tones of steel for one percentage point of GDP growth – that is unheard of in the world’s modern history. We project that the ratio should moderate to 30-40 million tones for every percentage point of GDP growth by 2020. |
These predictions are based on two big picture, consensus assumptions: China will move to a less commodity-intensive consumption-driven economy and growth will slow to 7-8% in the coming decade, from the 10.7% recorded in the previous decade.
However, although Chinese commodity imports are set for a slowdown - with a profound impact on commodity prices globally - this fact does not necessarily imply that infrastructure investment in China is set to fall. Quite the opposite, according to a report released last September by Royal Bank of Scotland analysts, who reckon China's rising GDP per capita will fuel demand for electricity and telecommunications infrastructure investments. In short, the resource-led and export-led infrastructure investment boom is over but rising consumption in the country's central and western regions, in particular, will set the stage for energy infrastructure investment.
While Credit Suisse argues the infrastructure investment party is over, the RBS analysts argued China will continue to dominate the region's spending amid growing urbanisation in the coming decades. It predicted that China’s infrastructure investment needs will amount to an eye-watering $10.5 trillion between 2011 and 2030, accounting for 55% of total EM infra investment spending. This compares with $2.9 trillion invested between 1991 and 2030, representing 57% of Asia’s total spending, led by electricity and road investment. The RBS analysts argued that China will continue to be the region’s heavyweight in infra investment over the next twenty years with the electricity and telecommunication sectors recording the biggest growth.
In sum, lower projected commodity import demand need not correlate with weaker infrastructure investment plans: commodity imports to fuel export-led manufacturers is likely to cool off, but infrastructure investment will remain strong in line with China’s rising GDP per capita, according to RBS analysts.
