Chinese demand for commodities is racing ahead of production, leading to pricing inflation and demand-supply imbalances that could jeopardize the stability of the global supply chain, according to research firm Standard & Poor’s (S&P).
The strong Chinese demand for major commodities is not expected to ease off anytime soon, despite the government's efforts to cool down the economy. This means prices for key commodities, including those used in the production of high-tech equipment, will continue to rise globally, boosting profits at suppliers but also pitching manufacturers against manufacturers, nation against nations, and injecting sometimes misleading forecast numbers into the supply chain.
Commodities suppliers aren't losing any sleep over China's rising demand for their products. In fact, the biggest suppliers are swimming in profits after prices surged to record levels in recent years. Fueled in part by sharp Chinese demand, prices for aluminum, copper, crude oil, gold, steel, and rare earth metals used in many electronics products have raced to new highs over the last few years.
Commodity prices have moderated slightly over the last several months due to concerns global economic growth might be slowing, but they are still above historical levels. In April, S&P estimates showed copper prices soared to a record $10,000 per ton, more than quadruple the $2,000-and-a-bit per ton from 20 years ago. A great chunk of the increase was a direct result of surging demand from China, which in 2010 expanded its consumption to about 7.6 million metric tons from 3.6 million tons five years earlier.
"As a consequence, China's share of total world copper consumption has risen dramatically, reaching 39 percent in 2010, from about 22 percent in 2005, and China is now the world's largest copper-consuming country," S&P said in a report entitled "The potential risk of China's large and growing presence in commodities markets." The report, available to subscribers, can be downloaded here.
Copper is not the only commodity where China is now the dominant consumer. In 2010, Chinese consumption of aluminum jumped to 43 percent of global demand from about 13 percent ten years earlier, putting the country ahead of the United States. In the steel market, China accounts for 42 percent of worldwide consumption in 2010, according to S&P. It also now accounts for 60 percent of global iron ore consumption and 52 percent of coking coal demand.
Finally, China's demand for crude oil is racing well ahead of domestic production. "In 2010, China was the world's second-largest oil consumer, accounting for about 10 percent of world demand, after the US, which accounted for 22 percent. China met only 45 percent of its crude oil requirements internally in 2010, and it is now the second-largest oil importer after the US," S&P said in its report.
Why should any of this trouble anyone? And why should anyone in the electronics industry be concerned that Chinese demand for commodities is rising so steeply? In fact, shouldn't the electronics industry be happy China is able to secure the raw materials required for keeping high-tech production lines humming? I'll let Standard & Poor's make the case for why you may want to pay attention:
China's growth as a consumer of commodities has had dramatic ripple effects across world commodities markets -- straining supplies, causing prices to soar, spurring production capacity expansion projects, and setting in motion a wave of mergers and acquisitions.
With commodities prices having been at or near record levels earlier this year, Standard & Poor's Ratings Services is naturally concerned that the current situation represents an unsustainable bubble, subject to a sudden correction. And if current market conditions in commodities do represent a bubble, a significant deceleration or downturn in China and other emerging economies could ultimately cause the rupture.
As in previous times of supply-demand disequilibrium, the research firm is concerned commodity suppliers are currently more focused on the "market strains resulting from having to 'feed the dragon,' " and do not appear worried that "a rapid deceleration of China's consumption of those commodities could quickly leave the global market beset by excess supply."
I can understand that. Why worry about a problem that seems quite unlikely to materialize? That said -- this industry has been burned numerous times before by failure to heed signs demand is overheating.
Interesting partnership... it definitely makes sense. Countries need to understand that investing in their own infrastructure might be the best investment they can make (something Korea learned early on).
If they decide to sell their minerals and get cash or bonds, while it's money -- maybe they won't know how to invest it efficiently (and end up losing part of it in bureocracy - to say it nicely).
Countries are slowly but surely adapting this route.
I see Countries like Chile and a few nations in Africa sign deals along these lines only.We will give you the Commodities but in return you have to give us Roads,Dams,Bridges and Schools.
It's interesting to see how that plays out. Insourcing started taking importance a few months ago but an article in EBN later told us that it won't live for long.
China NEEDS to slow down according to some economic analyst.
I know they aren't being forced, in the strick sense of the word. But when we think of developing countries, in most cases, we should also associate it with lack of long term vision and that makes them think that they money they can get now is what matters.
If a govmnt has a careful plan, it might realize that it's better for them to not export something and have it, at a lower price, to promote local industries. If not, they will only have the $ obtained from the sale, no long term progress in that.
I guess in terms of feeding Chinas Commodities, China is facing a bigger problem, their economy is getting stronger and it will become less attractive for invesment, few Years ago their R&B was 8 to 1 against the US dollar, Now is around 6 to 1, what this means is that investors will have to spend more money to make bussiness with China, what is forcing to look else where.
seems like soon we will have an ew player on OEM / ODM partnership.
That makes perfect sense in the context of looking at how Commodity cycles develop.
Boom and Bust is very much the hallmark of these cycles.The Analysts at S&P realise that and are just trying to warn enough people in the hopes of smoothing that cycle.
Too bad people don't realize it (and keep screaming this time is different) again and again and again.
Maybe Commodity Bulls should just open their history books.
What do you think?
Do you think Manufacturers have what it takes within themselves to,
"
It offers manufacturers the opportunity to understand better how to prepare for, anticipate and strategize against market imbalances.
Exctly, there's no local industry... but maybe it's because steel is so expensive!
It's a question of policies, and maybe a 10-yr strategy. Build local industries with the local supplies (no export) and after that, export to the current market price (which will be higher because of scarcity - due to the local-only policy).
By moving to the core of the industry and offerings services that keep the system humming, a group within the electronics market has rendered irrelevant the question of ownership and control of the supply chain.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
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