China and commodity prices
January 21, 2005
China’s demand for raw materials has had a significant
impact on metal prices. Its demand for ores and metals has increased
fifteen-fold since 1990, and as China continues to urbanize its
population and modernize its economy, its demand for raw materials
is likely to increase by orders of magnitude.
The economic ascent of China is probably the single most important
economic event of the twenty-first century. Within twenty years
China could surpass Japan to become the second largest economy and
before the end of the century it will most likely be the largest
economy in the world.
Even though Chinese demand will continue to drive
commodity prices higher for the next fifty to a hundred years, my
own investment horizon does not stretch that far. And I am concerned
that in the short-term, the current bull market in commodities has
come to an end.
Before we go any further, let me state for the record
that gold is not a commodity. It is money. So when I am referring
to commodity prices I am explicitly not including gold. Metal commodities
are things like copper, zinc and lead.
My concern for the commodities bull market hinges
on the fact that I believe the US economy is in trouble. If the
US is heading for a recession, and US consumer demand wanes as a
result, it will most certainly impact the Chinese economy, which
will impact China’s demand for commodities, and that could
cause commodity prices to drop.
The Chinese economy is not yet ready to sustain its
own economic growth. Much of the economic growth in China has been
due to increased trade between China and the rest of the world.
China’s gross domestic product increased three-fold from 1990
to 2003, but its trade volume grew seven-fold during that time.
China’s trade, as a percentage of gross domestic product,
increased from thirty-two percent in 1990 to sixty-five percent
in 2003. Therefore, a decline in trade will significantly impact
China’s gross domestic product, and a downturn in China’s
economic activity will reduce its demand for raw materials.
China is particularly sensitive to US demand. US imports
of Chinese goods increased eight-fold from 1990 to 2002 and now
account for roughly forty percent of all goods exported from China.
So, if the US’s spending spree is over, as I
suspect it is, then China’s economic expansion could take
a breather, and that could lead to a decline in commodity prices.
One exception is uranium, but that’s another story.
Paul van Eeden
PS I will be in Vancouver this weekend speaking
at the Cambridge House investment conference (www.cambridgehouse.ca)
and at the Cordilleran Roundup (a mineral exploration conference)
the following week, so there will not be a commentary next week.
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
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