As markets continue to roar forward, many investors have turned their gaze toward the commodity world, wondering how this asset class will fare after a “super-cycle” filled with gains. While there are a number of important factors at play, it is widely agreed that China will have a significant impact on the future of some of the world’s most popular hard assets. What is not widely agreed upon, is whether or not the Chinese economy will hinder or enable commodities going forward, as the emerging nation has seen its economy cool off.
The Bull Case for China
While China’s economy may not be growing at the rates seen in the early 2000s, the economy is still expanding much faster than many developed nations around the world. As its population continues to increase, so too will the needs and demand of the nation. As a country, China will need to consume more commodities and goods as they continue to see a growth in the number of inhabitants. At worst, many estimate that China will continue to expand at a healthy 7% for the coming decade, figures that bode well for a jump in commodity demand and consumption.
“All else being equal, unless China’s commodity intensity, defined as the amount of a commodity consumed to generate a unit of output, falls dramatically, its demand for commodities will be greater this year than it was last year,” writes Dambisa Moyo. Moyo argues that as long as China’s demand grows faster than global supply, prices will continue to rise. But that assumption is one that many have challenged in recent years, as the BRIC nation has watched its growth dramatically fall from what it had once been.
The Bear Case for China
The world’s most populated country saw its growth drop to 7.8% last year, the lowest it has seen in over a decade. For years, many have been expecting, and possibly pricing in, an increasing need for commodities from China; but if growth continues to curtail, those expectations could fall short. The country’s demand for “commodities such as iron ore, copper and coal also slowed to single-digits, sending traders scrambling amid fears of a ‘hard landing’ for the Chinese economy,” writes Leslie Hook.
Another factor that many seem to forget is that as China grows and continues to develop, it will be more able to provide for itself. For example, the country currently imports a fair amount of coal despite being a major producer; as the years go on many expect technological advancements to help the country become independent when it comes to this commodity.
The Bottom Line
While no one can say for sure how China’s future growth (or lack thereof) will impact commodity prices, it can be said with a fair amount of certainty that all eyes will be fixed on this emerging nation. With China being among the largest consumers for a number of popular hard assets, investors would do well to keep tabs on developments in the Chinese economy and adjust their commodity positions accordingly.
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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
No positions in stocks mentioned.