China drives the price of commodities and inflation waits in the wings (update)
As China’s middle class expands and as its business and manufacturing sector continue to grow, it is driving the price of commodities higher because of increased aggregate demand for relatively scarce commodities:
While China’s GDP is only 9.4% of the global economy, and its population is 19% of the world population…
- Cement demand represents 53.2% of global demand
- Iron ore = 47.7%
- Coal = 46.9%
- Pigs = 46.4%
- Steel = 45.4%
- Lead = 44.6%
- Zinc = 41.3%
- Aluminum = 40.6%
- Copper = 38.9%
- Eggs = 37.2%
- Nickel = 36.3%
Some of that demand is relatively stable, like food consumption. The world’s largest country has a middle class that can afford meat for the first time…..
Obviously this means that competition for these commodities will push prices higher and higher. It is these sorts of numbers that cause me to doubt seriously those who claim inflation is not a threat. Certainly the price for commodities is going to go up based on nothing more than China’s demand. And if it costs more for those commodities, that means costs for products based on them are going to rise as well – everywhere. Add in the money supply woes (i.e. literally dumping trillions in dollars into the economy to no real effect) and debt problems and you have a mix of reasons why, while it may not be evident just yet, inflation seems to be a certainty in our near future.
UPDATE: More on food commodities. Interesting article. Much that is produced in China in terms of grain is going toward feeding livestock. So that puts even more pressure on costs for grain, etc.
China was until recently self-sufficient in soybeans, for example. But now they are producing the same amount as they always have (15 million metric tons) but importing 3 times that to keep up. Corn, wheat and rice are headed in the same direction:
Xiaoping said that most of the land in China that can be farmed profitably is already under cultivation and that available land is actually shrinking in the face of development. In addition, yields are beginning to plateau, he said, with little expectation of major gains.
He said he expects China to increasingly import corn to keep up with demand resulting in part from dietary changes and its use in producing biofuels.
That means upward pressure on prices for everyone.