China sheds a few basis points of economic growth and investors take $305bn of commodities bets off the table. Does the arithmetic stack up?
Industrialisation in the world's third-largest economy has provided
a huge boost to commodity prices in recent years. No wonder. From 2003-07, the country accounted for almost all the global incremental growth in demand for lead; 70 per cent for aluminium and 62 per cent for copper, according to Lehman Brothers.
China's economy has grown in excess of 10 per cent annually for five years in a row and may yet scrape through for a sixth year – although probably not if slowing official numbers reflect reality. That in itself need not zap commodity demand. Fixed asset investment, around half of economic output, remains strong; government spending – including post-earthquake reconstruction – should take up any slack from the corporate sector.
Yet China can still spoil the day for commodity bulls. The country responded to soaring prices by ramping up domestic commodity production and foraging for alternatives. Take nickel. Stainless steel producers turned to lower grade nickel pig iron, shipped in from south-east Asia and blasted in local furnaces. By the end of last year, Merrill Lynch estimates, this substitute accounted for 7-8 per cent of global nickel supply (the consequent collapse in nickel prices has since shuttered many of these manufacturers). In 2005, China's copper production rose 42 per cent versus 7 per cent for consumption.
Hopes that power shortages in China will eliminate some of this local production and galvanise imports are wide of the mark. The energy-intensive aluminium industry is particularly hard hit: big producers are cutting production by up to 10 per cent from this month. But inventories are robust and the Chinese industry is not geared towards imports. Slower economic growth will play a part in denting global demand. But more important is China's unwillingness to pay the very prices it has helped inflate.
