For more than a decade, double-digit economic growth in China fueled an unprecedented demand for all kinds of commodities. Industrial metals such as aluminum, copper, and steel along with agricultural goods enjoyed a long bull run as China’s economy kept growing. But when China finally began decelerating and the Chinese market crashed, commodities fell hard.
Production that had been ramped up over the years suddenly created a supply glut, and commodities bottomed out quickly. Since then, mining and production companies have been aggressively cutting back in an attempt to balance out supply relative to global demand. But commodities are struggling nonetheless.
Looking for a Helping Hand
Excess capacity has been the main killer of commodity prices. Earlier this year there was a bump up in some industrial commodities like copper and steel as equity markets faltered and the dollar fell, but the underlying fundamentals never improved.
Despite the lack of demand, China has continued its policy of overproduction and kept its factories afloat, pulling out all the stops to keep them in business. The Chinese economy continues to be oversaturated with surplus goods from factories that enjoyed the days of easy credit and government support before the crash. Now, the Chinese government is subsidizing manufacturing plants and giving them cash infusions worth billions in order to keep them alive.
Steel makers, coal miners, solar-panel manufacturers, chemical makers, and other manufacturers are keeping their foot on the gas despite hemorrhaging losses thanks to government support programs. Everything from reducing utility costs to financial aid programs are being used so that overproduction will continue as scheduled despite the state of the economy.
Other countries are taking measures to limit China’s impact on the commodity markets by increasing taxes on Chinese imports of solar panels, steel, and other products. Companies like U.S. Steel have reported losses in the billions due to increased Chinese competition from companies that can sell their products much more cheaply. Despite the increased taxes on imported goods and drastic cutbacks in manufacturing companies in other countries, the sheer volume of Chinese output is overwhelming.
The Bottom Line
China’s departure from the manufacturing scene left a gap in the global economy. While production levels from other countries have been slashed, until China reduces its manufacturing output, the only way commodities will come into balance will be if another emerging-market economy steps in to replace what’s been lost.
India seems to be the most likely candidate as its estimated GDP growth of 7.3% has officially surpassed China’s 6.7% growth. But it will take time for India to grow enough to warrant a comparison to China as far as commodity demand goes. Right now commodities look like they’ll be bouncing off lows for the foreseeable future until the global economy begins to expand again.