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)

Price of Nickel Down 30% January - August 2008

The price of nickel continues to fall, down 30% so far in 2008. Falling prices together with rising costs are making many nickel operations unprofitable. Russia's Industrial Metallurgical Holding has shut down 30% to 40% of its production capacity because falling nickel prices made its operations unprofitable.

Despite the lower prices, demand from the stainless-steel industry, the main consumer of the anticorrosive metal, hasn't picked up. Instead, buyers appear to be hoping for even lower prices.

Nickel producers are being squeezed by energy prices and the rising costs of sulfuric acid, a key component to extract nickel laterite ores. Sulfur prices have rocketed from an average of just more than $100 a ton last year to more than $800 a ton.

The Price of Nickel is Down 30% January - August 2008

The Price of Platinum, January - July 2008

Source: Wall Street Journal

The Price of Gold, January - July 2008

Source: The Wall Street Journal

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