A lot of this year’s slump in commodity prices is being tracked back to the massive ructions in the Chinese economy. It’s slowing down, and demand for the materials that have fuelled its astonishing boom is trickling away.
But according to analysts at Goldman Sachs, it’s not all a bad story. In fact, the way China’s consuming commodities indicates that the country’s enormous economic transition is working, not failing.
Some commodities, like iron ore or cement, are necessary for massive industrialisation, and Chinese demand for them exploded during the boom years. Goldman’s note refers to them as capex (capital expenditure) commodities.
Growth in others, like gasoline and coffee (opex or operational expenditure commodities) indicate that something else is going on — that a population is getting richer, and spending more on things like food and personal travel.
In China, consumption of capex commodities is slumping, against rapid growth in opex commodity consumption.
The more capex-intensive the commodity, the weaker the demand growth, while the more opex-intensive the commodity, the stronger the demand growth. Demand has declined by 5.0% for cement, yet demand for gasoline is up 19.1%. This pattern suggests that policymakers are, at least to a degree, successfully creating the conditions for the much-anticipated rotation in economic growth away from investment and towards consumption.
And that’s pretty important. Beijing is currently trying to rotate away from being the world’s investment-heavy, export-driven industrial powerhouse and towards an economy more driven by domestic consumption and services. That’s how the country will stop itself getting stuck in the middle income trap — policymakers hope.
Here’s how growth in demand in different commodities looks, with those used most intensively for fixed investment (bottom) to those used most intensively by consumers (top). It’s a clear relationship:
It’s impossible to say whether the sort of growth seen in the opex commodities is enough to allow China’s economy to transition. It’s the biggest economy in the world by purchasing power parity, and probably the most largest single test of development economics in the history of the world.
But the figures are at least all heading in the right direction.