China has experienced the greatest economic miracle in history. Just over 50 years ago, the country was coming to the end of its “Three Bitter Years”, during which as many as 50 million people starved to death. This ranks as perhaps the greatest famine in human history. Yet China is now the world’s number 2 economy and will likely become number one within a few years. In fact, by some measures it may already be larger than the United States.
Lifting a billion people out of poverty was monumental task that demanded incredible amounts of resources. China has been responsible for much of the growth in commodity demand, and thus the commodity bull market, over the last decade. Via higher commodity prices, China has spread some of its prosperity to resource producing countries around the world. Brazil, Chile, Canada, Australia, South Africa and Zimbabwe can all thank China for at least some of their economic performance over the last few years, but the good times may be over.
To give you some idea of just how important China is to the world’s miners, over 40% of the world’s copper, steel and aluminium is consumed by China. This despite the fact that China accounts for less than 20% of the world’s GDP. The reason for this ‘overconsumption’ is the fact that the Chinese economy is based on investment and manufacturing rather than consumption and services.
The consumer sector makes up about 1/3 of the Chinese economy but over 2/3 of the America’s. The bad news for commodity producers is that fact that China wants to become more like the US. A consumer based economy employs about 30% more people than a manufacturing based one. Thus China could grow at a much slower rate and still not experience unemployment if its consumer sector were bigger.
This is not idle speculation; though China’s vast size makes it in some ways unique many other countries in Asia have already gone through this process. Japan, Taiwan and South Korea all reduced their resource consumption after they become rich. Thus we must get used to the idea that China will not consume commodities at its current level forever and when this occurs commodity prices will fall precipitously.
This does not mean that commodity producing countries are doomed. It simply means that the days of exporting un-beneficiated commodities are coming to an end. By moving up the value chain resource exporting countries can survive the coming commodity bear market and perhaps even prosper.