In Part 1 of this 4-part series on globalization, I discussed some recent articles about demographics and jobs, and how, despite the current political climate, policymakers and business executives are going to have to figure out to address localized skill shortages in the future. In this post, I want to discuss recent articles dealing with resource flows. Over the past year, most of the headlines about this subject seem to have been focused on two topics: first, China’s monopoly of rare earths (i.e., China accounts for 97 percent of the world’s supply of rare earths); and, second, volatility in commodity prices. I discussed the rare earths situation last October in a post entitled China and the Rare Earths Conundrum. In that post, I noted that even though China has a near-monopoly on rare earths production, 70 percent of the globe’s rare earth reserves are found outside of China. The reason that other countries have allowed China to monopolize rare production is because extracting these minerals can be expensive and environmentally damaging.
Since they are the building blocks of commerce, natural resources are important avenues of income for countries that possess them and necessary commodities for industries that use them. Because resources are not evenly distributed across the globe, commodity trading (i.e., the movement of natural resources from part of the world to another) rests at the heart of globalization. For decades now, developed countries have been reliant on oil and, as a result of globalization, over the last couple of decades we have seen the largest historical transfer of wealth from one region of the world to another. Not all of this has been the result of the oil trade, China’s rise as the world’s workshop has also contributed significantly to this trend. In fact, when you talk about resources and commodities, China must inevitably enter the conversation.
Over the past decade, China has been “on a commodities buying spree.” [“China And Commodities: A Discussion,” Forbes, 4 June 2009] The article notes that China has made significant purchases of gold, copper, iron ore and oil as well as other commodities. Steve Forbes declared, “China has been on a commodities hoarding binge, stockpiling copper and iron ore at a feverish pace, in addition to other raw materials.” More recently, Isabella Steger has written, “We know China is on an insatiable quest to buy up commodities all over the world.” [“Digging Deeper into China’s Quest for Commodities,” The Wall Street Journal, 13 April 2011]
With China and other emerging market countries trying to ensure that they have secure access to natural resources for the foreseeable future, it is no surprise that commodity prices have steadily climbed. Many analysts see this trend continuing as long as countries like China, India, and Brazil enjoy double-digit or near-double-digit economic growth. Derek Thompson asks, “What happens when China slows down?” [“The World’s Next Great Bust: China and Commodities,” The Atlantic, 17 March 2011]. He writes:
“Many metal futures, like copper, are at record highs, up more than 40% since 2010. The stocks of global mining companies like Rio Tinto have doubled in the last year. The economies of metal-rich nations in South America are booming. And why shouldn’t they? Supply for commodities is still tight, and demand for metals is still high, thanks to fast-charging developing countries, such as India and China. There’s absolutely, 100%, no way the market for commodities dries up any time in the near future, right?”
You can tell from the way he worded his last question that Thompson doesn’t believe the assumption to be true. In an interview with Thompson, Vikram Mansharamani, an equity investor and Yale lecturer, indicated he is not among those who believe that the commodity market will remain strong. Thompson continues:
“‘I’m a China bear,’ Mansharamani says. ‘China is exhibiting all the signs you would expect from an unsustainable boom.’ He first points to the housing market, where investment hit the inauspicious market of 6% of GDP — the same mark the U.S. hit in 2006 as the bubble was bursting. What’s more, outstanding loans for developers and residential mortgages in China have increased by a factor of FIVE in the last decade. Loan balances have nearly doubled in the last three years alone. Even worse, Mansharamani says, the Chinese government has spent lavishly to create demand that never materialized. He points to ghost towns like Qungbashi, in Inner Mongolia, a city designed for 1.5 million residents, but drew only 20,000 — hardly one percent. He points to the New South China Mall, not far from Guangzhou, which was built to handle 1,500 tenants. Instead, it houses a few dozen — hardly one percent. This sort of one-percent success rate creates ludicrous overcapacity that is eerily reminiscent of the empty homes and strip malls lining recession ghost exurbs in Arizona and Nevada. Mansharamani sees it as the prelude to a dramatic slowdown in government spending on buildings and infrastructure.”
If you’re someone who believes that China is a big threat, you might be happy to learn that it could stumble in the future. But don’t get too gleeful. Thompson reminds us that “US companies that specialize in unearthing commodities, like Bucyrus and Caterpillar,” have done very well thanks to business dealings they have had with China and other emerging market countries that have grown rapidly; but China is the kingpin. According to Thompson, “China’s share of world demand for leading metals like aluminium, copper, zinc, lead, nickel, and crude steel is about 40 percent. … For steel, China commands nearly half the global market.” He continues:
“Even these numbers understate the breadth of China’s impact. ‘Think how much steel is sold to Caterpillar or John Deere for capital goods that are sent to China,’ Mansharamani says. ‘Or how much is sent to Brazil to mine iron for China. Think of the countries that get dragged down with a commodities slow-down — South Africa, Brazil, Peru. The world shipping sector.’ If China slows down even to 5% growth a year, that will take a booming commodities market down with it.”
Mansharamani told Thompson that he doesn’t expect the commodity market to come tumbling down in the short-term “thanks to new demand out of Japan to rebuild after the quake and tsunami.” Fortunately, the Chinese are neither blind nor stupid. They are trying to engineer a soft landing rather than a crash. They understand that rapid growth is probably unsustainable and, according to Leslie Hook, Chinese leaders plan to slow the country’s demand for commodities [“China growth plans to slow commodities,” Financial Times, 8 March 2011] Hook reports:
“It is the world’s largest consumer of raw materials and has been the single biggest driver of the commodities bull run. So China’s latest five-year plan, the economic blueprint that will dictate future demand, will be nothing short of market-moving. [Beijing’s] policies … set the tone for China’s consumption of everything from iron ore to copper and cotton. At the heart of the plan … is a shift towards cleaner, slower growth. But analysts believe this is unlikely to translate into less demand for raw materials. ‘Commodities demand over the next five years will remain robust,’ says Graeme Train, analyst at Macquarie. ‘The key difference is that growth in that demand will slow quite considerably.'”
Hook reports that in Premier Wen Jiabao’s state of the union address the premier made several crucial announcements about growth and commodity consumption targets. She writes:
“Premier Wen Jiabao announced that by 2015 China would cut fossil fuel use to 88.6 per cent of energy supply, reduce energy consumption relative to gross domestic product by 16 per cent and cut carbon emissions relative to GDP by 17 per cent. Mr Wen also spoke of extending a nationwide mining and resources tax, and a potential cap-and-trade pollution tax. He cut the guideline GDP target from 7.5 per cent to 7 per cent.”
Analysts interviewed by Hook believe that current plans “are unlikely to put the brakes on China’s demand for commodities in the near term.” Mansharamani discussed the “ludicrous overcapacity” being generated in China and yet Hook reports, “The government plans to build 36m subsidised apartments during the next five years, part of a push to bring affordable housing into the cities that will fuel demand for construction materials such as steel and cement.” She continues:
“‘It is clear that there will be a lot of construction over the next five years, whether it is public housing, which is very significant, or the continued roll out of infrastructure in the middle provinces,’ says Ric Deverell, global head of commodities research for Credit Suisse. ‘It is unambiguous that you will have a lot of demand for steel and construction materials.’ Analysts believe these factors will support iron ore prices over the next five years.”
Hook reports that “China is the world’s second-largest net importer of thermal coal, used in power stations.” As more Chinese citizens enter the middle class, demand for energy is likely to continue to rise — even past the five-year projections being discussed. As a result, Peter Hickson, global strategist for basic materials at UBS, told Hook, “There’s a lot of opportunity here for importers of coal and iron ore.” Hook continues:
“In energy, China’s five-year plan could have an even bigger impact, as the government makes a push into natural gas and non-fossil fuel energy. According to the National Energy Administration’s targets, China will import 90bn cu m of gas a year by 2015 as well as producing 170bn cu m domestically. Although China has been a minor importer of natural gas in the past, that could soon change. Last year China’s imports of liquefied natural gas jumped 69 per cent to reach 9.4m tonnes. Already, state energy giants such as Sinopec and Cnooc are gearing up for LNG imports with long-term contracts in Australia and the Middle East. … China’s energy policies will also boost demand for uranium. According to Qian Zhimin, a deputy at the National Energy Administration, China could be the world’s largest importer of uranium by 2030.”
It will be interesting to see if the catastrophe in Japan dampens the Chinese appetite for nuclear power. Up to this point, I’ve primarily discussed mineral and oil resources. Another globally-traded resource that impacts every man, woman, and child on the planet is food. According to Terry Barrett, “Although food price inflation was relatively weak for most of 2009 and 2010, cost pressures on wholesale and retail food prices due to higher food commodity and energy prices, along with strengthening global food demand, have pushed inflation projections for 2011 upward.” [“USDA Retail Food-Inflation Forecasts for 2011,” Bloomberg, 25 April 2011]. Steve Hall reminds us that there are other commodities that need watching as well. [“Commodity Watch: Watching for dark horses,” Procurement Blog, 18 April 2011]. He writes:
“Putting aside the obvious topics – oil, corn, steel – this week has had an interesting array of rises and falls elsewhere. Let’s start with plastics. … Their price has moved and it does have a large impact on lots of areas of manufacturing. … [It] shows how the impact of rising oil prices are hitting different markets in different ways. … I would draw your attention to lumber. Again, not always the most talked-of commodity, but when it hit five-year highs only a couple of months ago, there was plenty of speculation that, well, the speculation that was propping up the price, would die away. As the FT pointed out just over a month ago, whether it is belief in the revival of the real estate market, in the US in particular, supply issues or, indeed, speculation – there were plenty of reasons to suspect the price would fall off its perch. In the last month it has fallen around 21% in the last month, and 2.36% in the last week. Finally, let’s look at meat. … Feed prices [are] a concern, and there are some parallels to be drawn with the situation in plastics: key material prices and ballooning demand in key economies have potentially played a role in keeping prices in a diverse array of commodities on the up. For retailers, whether of burgers, plastic cutlery or even plastic pigs, there are difficult decisions ahead and knowing whether prices have been artificially inflated or whether supply and demand are genuinely on the move to push prices up could be crucial.”
As I noted in a previous post, the majority of trade that takes place around the world is still in products. By “products” I mean either the raw material from which finished goods are made or the finished goods themselves. With a growing global middle class, I don’t expect the market for consumer goods to diminish — which means that the global trade of some resources should also remain strong. Even if infrastructure construction in emerging market countries slows down, developed countries like the United States, whose infrastructure needs a little tender loving care, could keep demand for commodities high. Tomorrow I will discuss the flow of capital around the world.