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With the end of the supercycle, copper prices have dropped 30% from their 2011 peak, and iron ore is down 32%.
Though it was summertime, a tinge of ice was in the June air at this year’s St. Petersburg International Economic Forum. “There is no magic wand we can wave,” said Russian President Vladimir Putin, acknowledging the abrupt drop in Russia’s growth rate. “Prices for our main exports rose fast” for many years, he told the forum, but now “the situation has changed. There are no magic solutions.”
What is giving Russia and many other countries the shivers is the China Chill that is the result of the slowing Chinese economy. It means a recalibration for the world’s exporters, who have come to count on vigorous Chinese demand. It will be a particular challenge for commodity exporters. Over the past decade, they have been the great beneficiaries of the commodity “supercycle”—the combination of accelerating demand and rising commodity prices that have delivered GDP growth. With China’s slowing, the supercycle is over, meaning tough choices ahead.
The supercycle began a decade ago, in the middle of 2003. China had already reported two decades of 10% annual economic growth. In 2000, its growth began to speed up, fueled by a tilt toward heavy industry. The rapid pace of industrialization and urbanization led to accelerating demand for copper, iron ore and other commodities. China’s economy grew almost two and a half times from 2003-12. Hence it’s gargantuan appetite for commodities to fuel its industrial machine and support the shift of 20 million people a year from the countryside to cities.
The world’s commodity-supply system, accustomed to excess capacity and weaker demand for its products, was not ready. Something had to give, and that something was price. Commodity prices took off at a breathtaking pace. There was a stumble at the beginning of the recession in late 2008. Then, as Beijing’s massive stimulus kicked in, China’s economy roared back and so did the hunger for commodities. Copper prices reached their peak in 2011—six times higher than in 2003. China was consuming about 40% of the world’s copper, up from less than 20% in 2003.
Thirty years of 10%-a-year growth on such a scale was a record in the world economy. Yet at some point such growth was bound to become unsustainable, and that is what is now happening in China. It has run into what Premier Li Kequiang has described as the “serious structural problems” that “middle income” countries encounter. China can no longer depend upon exports as the main driver of growth. Rapidly rising wages—15% to 20% a year in coastal provinces—are eroding the labor-cost advantage that lifted exports.
This is showing up in economic performance. In each of the past five quarters, China’s annual GDP growth has been under 8%—7.5% in the latest, ended in June. Its leaders seem to have concluded that the country is facing a historic transition from export-led growth to growth increasingly driven by domestic consumption. “I don’t think China will be able to sustain a superhigh or ultrahigh speed of growth and that is not what we want,” China’s new president Xi Jinping told foreign businessmen in April. “China’s model of development is not sustainable.”
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