Low Chinese demand is blinding us to the obvious
China’s gross domestic product growth is slowing. It might even have stalled completely. That means China’s demand for all industrial commodities is falling and is going to keep falling. And that means you shouldn’t invest in any of the big mining companies ever again.
Without China importing 50 per cent of every commodity produced everywhere to build its millions of miles of super-fast railways, prices can’t rise, profits can’t rise and share prices can’t rise.
Sound like a familiar argument? It should do. It’s been in every paper and on every analyst’s lips all year. If you look at a couple of charts of commodity demand and prices you can see why.
China’s global metal imports were flattish until the late 1990s. They then soared into 2009 (the 10 per cent a year “miracle” growth period) before slowing and flattening again into 2011, when growth started to slow.
Prices did the same: the benchmark CRB commodities index peaked in 2011. Since then, it has fallen nearly 50 per cent. This year alone, the prices of copper, palladium, platinum and iron ore are all down around 20 per cent. Nickel has fared a little worse (down just over 30 per cent) but there is no doubting the general direction. Down and down again.
Clearly commodity prices need Chinese demand to soar again if they are ever to rise again. It won’t, so they won’t. The commodity supercycle we all loved so much in the noughties (me included) is dead.
That’s the market’s story anyway — and it is sticking to it: sentiment towards commodity investments is at an extreme low.
But here’s the thing. It might be the wrong story. What if the prism of Chinese demand is not the correct one to view the market through?
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