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.