Several commodities may lose a long-standing structural demand driver in China's economic shift.
Through sustained rampant growth, China has forged itself a place as an economic powerhouse in the international community. Typifying this trend, the past 10 years saw annual real GDP growth in China consistently range between roughly 9% and 14%. However, few, if any, economies can sustain such growth forever. Today, we believe China stands at the precipice of a major economic inflection.
A weak global economy has left the traditionally export-driven nation without a reliable outlet for extrinsically driven growth. The most recent additions to GDP have come from fixed-asset investments, but it seems that those avenues, too, have been exhausted. With the passage of the nation's 12th five-year economic plan, the shift toward a consumer-led economy is officially underway. The shift stands to take the wind out of the sails of commodity inputs relied upon throughout the nation's infrastructural binge.
Signs of a Turning Tide
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The interesting point here is not that infrastructural investment is a waning driver of growth. China built an expressway system that rivals that of the United States. The nation constructed millions of high-end commercial and retail properties priced so far above the common Chinese people's affordable range that vacancies have brought about the nickname "Ghost City." Expansion of supply without a demand to meet it couldn't have continued indefinitely. The economy is likely to shift further toward a consumer-driven growth balance. The peculiar point, however, is that the balance will likely come from a decrease in investment, not an increase in consumption.
China's Commodity Footprint
The shift toward a more consumer-centric growth balance in the future carries serious implications for the hard assets that the nation relied on for growth in the past. China has grown to demand the largest stakes of a number of commodities and understandably so. In addition to the infrastructural and real estate boom that required vast amounts of industrial commodity inputs, China also maintains the world's largest national population. This means that national demands for agricultural and energy products are accordingly lofty. The difference between the segments of commodities is that those used to satiate the day-to-day requirements of the populous are much less likely to see a Chinese-driven change in the near term. Their industrial counterparts, however, have seen a paradigm shift.
The demand that China provided the industrial metals space over the past decade was an inherently structural one. The nation staked its reputation on breakneck growth rates that could be achieved only through continued development. Such capital formation relied heavily on metals such as copper and steel. As the nation's fixed asset investment cycle slows, so too will a demand that had been baked into industrial commodities markets for at least the past decade.
We mentioned steel earlier as an indicator of the state of fixed-capital investment. While China is, in fact, a substantial consumer of the metal, it satiates most if not all of its demand with its own production. To identify the repercussions of cooling fixed-asset investment here, we may need to look further upstream. True, China produces most of its steel, but it does so with imported iron ore. The nation has long been the top consumer and importer of the base metal, but the impacts of a shift would be felt in places such as Brazil and Australia. The world's largest iron ore producers are Vale, Rio Tinto (both Brazilian), and BHP Billiton.
Exchange-traded funds likely to be hardest hit by the softening metal demand