http://online.wsj.com/home-page
The outlook for global prices depends heavily on whether the country maintains its voracious appetite for oil, copper and other products. You want to know where the global commodities markets are heading in the coming years? Then it’s probably best that you remember a single word: China.
As the biggest and one of the fastest-growing of the world’s developing economies, China has become a voracious consumer of industrial and agricultural commodities. Its shifting needs are now the most important driver in the prices of many of those goods. Producers often base massive capital investments largely on their expectations for Chinese demand for their products. Investors often make similar calculations before buying or selling commodities contracts or related securities.
That’s why no single factor is likely to have a more far-reaching impact on commodities markets over the next few years than how Chinese demand changes as the country’s economy evolves. “That’s the big question,” says Richard Adkerson, chief executive of Freeport-McMoRan Copper & Gold Inc.
So what’s the answer? Here are three possible economic scenarios, and what each would mean for global commodities markets.
Full Speed Ahead
If China’s consumption of commodities continues to grow at the rate it has over the past 10 years, this is what the world would have to do to meet that demand in 2020, assuming that the rest of the world’s collective appetite doesn’t change at all:
• Pump almost as much additional crude oil as Saudi Arabia now provides per year.
• Grow more than three times as many soybeans as currently come out of Iowa, which alone provides 5% of global output.
• Extract nearly three times as much new copper as the current annual production from Chile, which mines about four times as much as any other nation.
And that’s just for starters. Vast increases in supply would be needed for all sorts of other commodities as well.
Prices that rocketed to record heights in recent years on Chinese buying could fly even higher. That would be good news for companies that produce those commodities and investors who have placed bets on them—unless high prices abruptly choke off demand or spur the Chinese and other buyers of commodities to seek alternative goods.
Materials in tight supply or at risk of significant constraint, like crude oil, copper and palladium, could be vulnerable to sharp price increases. Their prices shot up 50%, 106% and 207%, respectively, in the five years through 2010. By contrast, aluminum is plentiful, cotton production is rising sharply and nickel output is climbing—at least for the moment—which can make them less vulnerable. It’s also easier to produce some commodities in greater quantity when needed, which can limit price shocks. It takes less time, for example, to grow more corn than it does to find new oil beneath the ocean floor.
Many analysts consider the fast-growth scenario improbable. The consensus is that China is headed for slower economic growth than it experienced from 2001 to 2010, when its annual rate of expansion ranged from 8.3% to 14.2% and reached double digits six times, according to the World Bank. If the consensus is right, the question becomes how much China’s growth will slow.
The Hard Landing
For the rest of this article, please go to the Wall Street Journal website: http://online.wsj.com/article/SB10001424052970204012004577073971768290922.html