OPINIONAugust 8, 2013, 7:12 p.m. ET
Daniel Yergin: China’s Big Commodity Chill
With the end of the supercycle, copper prices have dropped 30% from their 2011 peak, and iron ore is down 32%.
By DANIEL YERGIN
Though it was summertime, a tinge of ice was in the June air at this year’s St. Petersburg International Economic Forum. “There is no magic wand we can wave,” said Russian President Vladimir Putin, acknowledging the abrupt drop in Russia’s growth rate. “Prices for our main exports rose fast” for many years, he told the forum, but now “the situation has changed. There are no magic solutions.”
What is giving Russia and many other countries the shivers is the China Chill that is the result of the slowing Chinese economy. It means a recalibration for the world’s exporters, who have come to count on vigorous Chinese demand. It will be a particular challenge for commodity exporters. Over the past decade, they have been the great beneficiaries of the commodity “supercycle”—the combination of accelerating demand and rising commodity prices that have delivered GDP growth. With China’s slowing, the supercycle is over, meaning tough choices ahead.
The supercycle began a decade ago, in the middle of 2003. China had already reported two decades of 10% annual economic growth. In 2000, its growth began to speed up, fueled by a tilt toward heavy industry. The rapid pace of industrialization and urbanization led to accelerating demand for copper, iron ore and other commodities. China’s economy grew almost two and a half times from 2003-12. Hence it’s gargantuan appetite for commodities to fuel its industrial machine and support the shift of 20 million people a year from the countryside to cities.
The world’s commodity-supply system, accustomed to excess capacity and weaker demand for its products, was not ready. Something had to give, and that something was price. Commodity prices took off at a breathtaking pace. There was a stumble at the beginning of the recession in late 2008. Then, as Beijing’s massive stimulus kicked in, China’s economy roared back and so did the hunger for commodities. Copper prices reached their peak in 2011—six times higher than in 2003. China was consuming about 40% of the world’s copper, up from less than 20% in 2003.
Thirty years of 10%-a-year growth on such a scale was a record in the world economy. Yet at some point such growth was bound to become unsustainable, and that is what is now happening in China. It has run into what Premier Li Kequiang has described as the “serious structural problems” that “middle income” countries encounter. China can no longer depend upon exports as the main driver of growth. Rapidly rising wages—15% to 20% a year in coastal provinces—are eroding the labor-cost advantage that lifted exports.
This is showing up in economic performance. In each of the past five quarters, China’s annual GDP growth has been under 8%—7.5% in the latest, ended in June. Its leaders seem to have concluded that the country is facing a historic transition from export-led growth to growth increasingly driven by domestic consumption. “I don’t think China will be able to sustain a superhigh or ultrahigh speed of growth and that is not what we want,” China’s new president Xi Jinping told foreign businessmen in April. “China’s model of development is not sustainable.”
For countries whose economic fate—and GDP—are tied to commodity exports, the China Chill is a cold wind indeed. China will still be the biggest market for industrial commodities—but without the same accelerating growth in demand. Meanwhile, global production capacity has been greatly expanded to service the supercycle. Just as China did so much to fuel the supercycle, so its slowdown, more than anything else, is what has brought the supercycle to an end. The change is registered in prices. Copper prices are down 30% from their 2011 peak, iron ore 32%. Overall, the IHS non-oil commodity index is down 27% since 2008.
The end of the supercycle also means that commodities no longer march in lock-step with each other. Aluminum prices, for instance, are almost back to where they were at the beginning of 2004. Coal prices in China are down 40% since their peak in 2008. On the other hand, iron ore prices are still much higher than they were a decade ago, and in the last weeks have ticked upward in response to new Chinese trade data indicating increased commodity imports.
Oil producers, including Mr. Putin’s Russia, have benefited enormously from Chinese growth. A decade ago, the general expectation was that oil prices would stay in the $20-$28 a barrel range. Or lower. At an OPEC meeting in February 2004, one oil minister warned that “The price can fall, and there is no bottom to it.”
But then demand started to rise, and oil prices took off. That, too, was part of the supercycle. China alone accounts for 60% of the growth in world oil demand between 2003 and 2012. China is overtaking the U.S. as the world’s largest oil importer. But oil prices were also driven up by the “aggregate disruption” in the last decade from a number of diverse countries, including Iraq, Venezuela, Nigeria and the U.S. (after Hurricanes Rita and Katrina).
Oil prices today, in a general range of $105 to $110 per barrel, are more than four times higher than they were a decade ago. So far at least, they have remained immune to the general weakening of commodity prices. The reason is geopolitics—the instability in the Middle East, the impact on supply of sanctions on Iranian oil, and continuing supply interruptions from such countries as Libya, Nigeria, Yemen and South Sudan. But here, too, in response to high prices, the supply picture is changing. U.S. oil production is up almost 50% since 2008, largely from “tight,” or shale, oil from North Dakota, Texas and other states. The continuing growth in the supply of such unconventional oil could moderate oil prices in the years ahead.
The China Chill has created turmoil for the plans and investments of mining companies as well. The same is true of their managements. The majority of CEOs of the top mining and metals companies—including BHP Billiton, Rio Tinto and Anglo American—have been replaced in the past year. The new leaders are focusing not on expansion but on reining in investment, cutting back projects and consolidating their businesses.
In the end, how cold it will get for countries accustomed to endless demand growth from China depends in part on the world economy, especially Europe’s. It also depends on how well Beijing manages a soft economic landing and the rebalancing away from exports toward domestic consumption.
But exporters can no longer bank on the bounty of raw-material earnings to maintain economic growth and fund government spending. The cooling of global commodity markets will heat up the politics of the countries that had done so well during the now-defunct supercycle. Facing economic turmoil, politicians in Australia, Brazil, South Africa and many other counties—including Mr. Putin’s Russia—will have to face the tough questions about market reforms and economic and tax policies that the supercycle once let them avoid.
Mr. Yergin is author of “The Quest: Energy, Security, and the Remaking of the Modern World” (The Penguin Press, 2011). He is vice chairman of IHS.
A version of this article appeared August 9, 2013, on page A13 in the U.S. edition of The Wall Street Journal, with the headline: China’s Big Commodity Chill.