China Drives Growth of Global Commodities Demand

I was amazed to discover to what extent demand for commodities world-wide is driven by growth in China. In 2009 Deutsche Bank forecasts that almost 100 per cent of the growth in demand for aluminum, around 80 per cent of the growth in demand for iron ore, oil, and steel, and 60+ per cent of the growth in demand for copper will come from China.

Forecast of China's Share of the Growth in Demand for Commodities Worldwide in 2009

Although growth of the Asian manufacturing economies of India and China has slowed in response to slowing global markets and the recent credit crash, commodity prices remain high. Economist Jeffrey Frankel believes that that low real interest rates have been the cause as the continued strength of commodity prices:

One wouldn’t want to try to reduce commodity markets to a single factor, nor to claim proof of any theory by a single data point. Nevertheless, the developments of the last six months provided added support for a theory I have long favoured: real interest rates are an important determinant of real commodity prices.

• High interest rates reduce the demand for storable commodities, or increase the supply, through a variety of channels:
• by increasing the incentive for extraction today rather than tomorrow (think of the rates at which oil is pumped, gold mined, forests logged, or livestock herds culled)
• by decreasing firms’ desire to carry inventories (think of oil inventories held in tanks), by encouraging speculators to shift out of spot commodity contracts, and into treasury bills.

All three mechanisms work to reduce the market price of commodities, as happened when real interest rates were high in the early 1980s. A decrease in real interest rates has the opposite effect, lowering the cost of carrying inventories, and raising commodity prices, as happened in the 1970s, and again during 2001-2004. It’s the original “carry trade.” (http://www.voxeu.org/index.php?q=node/1002)

Cost of Shipping a Standard Container from China to the U.S.

Cost of shipping a standard 40-foot container of goods from China to the US:

2000 -- $3,000
2008 -- ~$8,000

Increase: 266% over eight years, caused largely by the increase in the price of oil from around $20/barrel to triple digits today. The result has been a dimming of appeal among manufacturers to outsource manufacturing to China and other Asian countries. The price of oil is making the world round, again.

The Balance of Trade Between the U.S. and China

U.S. Balance of Trade with China 1997 - 2007

Source: U.S. Census Bureau


How Other Countries View China

Source: Pew Research Center polls of 4,257 adultsin the five countries conducted in March and April 2008 (International Views)

The Value of Global Trade - All Imports and Exports

The total value of all global trade imports and exports was some $25 trillion dollars in 2007, with China contributing about $2.3 trillion and India contributing about $250 billion.

Source: Wall Street Journal

China's trade with industrial and developing countries - China imports nearly 57% more from developing countries than industrial countries, while exports are nearly the same.

Source: Wall Street Journal

Global Imports of Rice, Cotton and Sugar: 2000 - 2008

Source: Wall Street Journal

Higher grain prices, due in part to Ethanol production, have hurt beef production, even as demand for beef grows among developing economies.

Source: Wall Street Journal