Free Markets, Free People


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.

~McQ

Twitter: @McQandO

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15 Responses to China drives the price of commodities and inflation waits in the wings (update)

  • McQIt is these sorts of numbers that cause me to doubt seriously those who claim inflation is not a threat.

    I think that we’ve established over the past few years that most economists don’t understand the market, starting with the basic law of supply and demand.  Certainly politicians don’t get it.

    I suppose that the food for all these rising middle class Red Chinese is going to come from the same place as the electricity for all the green cars we’re supposed to start driving.  For that matter, it will come from the same place as the green cars themselves.

    Jebus…

    • Geez, doc, don’t get all Malthusian on us!  Go back to your econ. basics.  AS you see prices rise with greater demand, unless you have a rare situation where there really is a dearth of something, you WILL see people moving in to meet that greater demand with increased supply.  It is one of those wonderful “information” things that markets manage so well.
      Even where you see a real dearth of something, you’d see people wiring around the use of that thing.  The Law Of Substitution.

      • Oh, I realize that the market will adapt.  This puts me ahead of many “economists” who seem to think that the Law of Supply and Demand – somehow – got repealed in the past twenty years or so.

  • Yes, it is possible for the food-related commodities to continue to experience great demand from China.

    The rest of those commodities (cement, copper, iron, etc.) — no, not so much.

    One of the biggest sectors of the Chinese economy that has been driving their 8-10% annual growth is real estate: construction, sales, asset appreciation, and so on.

    If you thought that OUR housing bubble was huge, wait until the Chinese real estate markets begin to correct. They have entire ghost cities out there, where they built the housing, but neglected to hook up basic services like electricity, water, and sewage. Nobody lives in those cities; they are completely abandoned. The banks that loaned the money to build these cities are on their feet only because the Central Bank of China has been continuously re-capitalizing their losses.

    The crash in Chinese real estate will be EPIC, so don’t count on those other commodities to rise in price based on Chinese demand.

    • Yep. You don’t need aluminum for windows, copper for electricity, or steel for rebar once the housing boom is over.
      However, the state in China decided that they need social housing, so they are now building that, plus all the new government buildings and trophy buildings in every little podunk city. Cities you have never even heard of have stunning ampitheatres, party buildings, or stadiums designed by foreign architects and made of steel or glass. All in a relatively poor country.

  • Boy, there are so many directions you can take with this post. Is China truly dynamic or merely a resource glutton surviving, meal-to-meal, hoping to really and truly become modern? I will state flatly that the Chinese middle class is a paltry (even if demonstratively important) part of the greater population. Consider what this guy is saying … in a nation of 1.3 billion anywhere from 100 M to 247 M are “middle class.” Granted, I ripped this from the first (semi) reliable site I googled and, yes, it is dated and stale but it does illustrate problem of calculations and meaningful ratios. … My position about this guy (?), he is a salesman making a buck on the mainland where the money is moving.
    Why, just the other day, I was talking with an American who had immigrated to Oz to set up his own business (which is thriving). He said, in effect, Australia is doing well (overall) because of its dense resource base; IRON ore, bituminous coal … opal mines, you name it and where does it go? China.
    That said; the guy I quoted gets a big literary “bump” of sorts by announcing that folks in China can eat meat for the first time! So, what? China’s aquaculture industry has been, was and still is HUGE and here, we are talking carp, yep, carp … “farmed” for centuries. When that guy starts to talk to me about a middle class that is dining on 100+ year old eggs during the glory of distant dynasties past, then, he will have my attention.
    To borrow the “egg” (still in its shell) analogy, it is real with China. They (the government) are hard on the outside and nothing but egg white and yoke on the inside: economically, socially, militarily and of course politically. … There is a reason why the CCP cracked down on any and all who might disagree. That shell must not break because it is the “vessel” that carries the CCP.
    All in all, I think a far more interesting comparison would be to examine differences between the ways India conducts its business dealings during the course of the acquisition of resources than that of China.

  • I’m going to remind McQ of what Dr. Friedman told us about inflation that won his Nobel Prize (in a day when they meant some damn thing).
    Real inflation only comes from manipulation of the currency.
    A rise in price coupled to a rise in demand is not really inflationary.
    Now, when you manipulate the supply of energy in the economy, that may be a thing Uncle Milton never considered, because that COULD easily be inflationary, too, since it ramifies throughout the prices of so many things.

    • China does manipulate its currency, by pegging it to the USD, they import our money printing.
      They also have had a habit of declaring increases in minimum wages due to food price increases…which sounds like a wage price spiral to me.
      I do think some “real” demand can help fuel inflation in such a setting, as it provides and excuse for everyone to raise their prices.

      • Well, point taken as to China.
        But OUR inflation comes from OUR government.  NOT from increased demand.  Higher prices are NOT inflation.  They are, like lower prices, signals within the market, and essential.

  • On a lesser scale, India’s following the same consumption trajectory.

  • What was laid out here was covered by the Copenhagen agreement that was left on the table a year and a half ago.  While most folks were concentrating on the “cap-and trade” portion of this “lost” agreement, they missed the parts that basically locked down nations into a global commodity/industrial control regime.

  • Two things.

    The demand increase for many of those things are products now produced in China that formerly were produced elsewhere.  There’s been a corresponding decline elsewhere for much of China’s increase.  The raw material consumption is not a good indicator of end consumer consumption especially for China.

    Many of those things are not scarce.  There are bottlenecks against rapid demand increased.  But eventually those will be satisfied.