Fundamentals unchanged

Until the global commodity markets went bottom up last August, one popular explanation for the boom in raw materials, energy resources and agricultural products was, simply, China. As the world’s top consumer of almost any commodity you care to name, China was thanked and blamed in equal measure for heralding a new era of inflated prices – the so-called “commodities super-cycle.”

The collapse in global commodity prices appears to have trashed that theory, and predicting how Chinese demand will play out in global commodity markets is a mug’s game. But one thing that has not changed: the fundamentals of Chinese demand. No matter whether China’s economy grows at 5% or 10% for the next 20 years, the nexus of a rapidly growing urban population, rising incomes and living standards, and an economic model based on high domestic investment all point toward a robust appetite for commodities.

Sure, over the next two or three years, China is likely to play a minor role in setting global commodity prices, thanks to the overwhelming fall in demand everywhere else. But once the rest of the world stabilizes, China will again emerge as the key driver of global demand.

Why? Because China’s long and irreversible process of urbanization makes it inconceivable that commodities demand will not rise substantially.

Your correspondent has harped on about urbanization in China before, but it is worth repeating because the pace and volume of the exodus from the countryside to the cities is unprecedented. In 1980, fewer than 200 million Chinese citizens lived in urban areas. Today that figure has exploded to 600 million, and is projected to reach 1 billion sometime around 2025.

While it is dangerous to take a ruler to urbanization projections and draw a line to the upper right-hand corner, these new urbanites will have a huge impact on demand for agricultural products and energy resources. Rising consumption of meat and dairy products translates into greater demand for imported animal feed. Around 40% of the world’s soya beans exports already go to China. Growing car ownership will boost not only oil imports but also demand for rubber used to make car tires. And thousands of forests will be chopped down to furnish millions of new apartments.

The high-rise towers in which these apartments are housed will require tons of steel rods for reinforcement, a reflection of China’s truly earth-shaking impact on demand for hard commodities. Metal intensity four times higher than in developed countries and twice as high as in other developing nations. The uptick in intensity, which began in the mid-1990s and accelerated at the beginning of the 2000s, mirrored an increase in the urbanization rate from 30-40%. In 2007, construction and infrastructure projects accounted for over 50% of Chinese steel demand and 44% of copper demand.

The astonishing pace of urbanization means that demand for hard commodities should remain strong for 20 years. In particular, copper consumption is likely to grow significantly over the next five to 10 years as China invests in a better power transmission system.

So forget talk about a paradigm shift in global consumption patterns. The Chinese dragon is about to get fatter.