China’s Metals Demand and Commodity Prices: A Case of Disruptive Development? Masuma Farooki [email protected] EADI/DSA Conference – 19 to 22 September 2011, York
Mar 28, 2015
China’s Metals Demand and Commodity Prices:
A Case of Disruptive Development?
Masuma [email protected]
EADI/DSA Conference – 19 to 22 September 2011, York
Commodities in Development: 1950-2000
Resource Curse:
1.Terms of trade
2.Elasticity of demand
3.Price volatility
4.Enclave nature of mining
5.Dutch disease
6.Conflict and governance
Commodities in Development: 2000 - 2011
Drivers of Commodity Price Boom
• Demand from Developing Countries: China
• Supply constraints
• Financialisation of Commodity Markets
Drivers of Commodity Price Boom
• Demand from Developing Countries: China
• Supply constraints
• Financialisation of Commodity Markets
China’s Commodities Demand
1. Why has China’s growth been commodity intensive?
2. How does this increase in physical commodity demand
translate into exports from developing countries?
3. Can the higher commodity prices negate the negative
relation between commodities and development?
China’s Commodity Intensive Growth
• Structural Change impacts Commodity Intensity
Percentage Share of Costs of Minerals/Extractive Sector in Industrial Production and Per Capita Income (PPP) 2004
China’s Commodity Intensive Growth
• Large Country Effect
• Developing Country Effect
• Trade Effect
Large Country Effect
1.3 billion people (20 % of global population)
•Small country effect has to be dropped
•Volume compensates for low elasticity of demand
Developing Country Effect
• Manufacturing is the dominant sector (47 % in 2009)
• Infrastructure: Expansion not maintenance
• Urbanisation: Increasing not stabilising
• Growth in Income: low income groups dominate demand
GDP Growth vs. Resource-intensive GDP Growth
Time Period
Consumption per capita
GDP per Capita
Growth
(%)Aluminium Copper
1962-1972 0.2 0.2 6.3
1973-1983 0.5 0.4 5.4
1984-1994 0.8 0.6 9.3
1995-2005 2.9 1.7 8.4
China’s Per Capita Metal Consumption and GDP Growth Rates (1962-2005)
Trade Effect
Domestic Production < Domestic Consumption
Impact on Commodity Exporting Developing Countries
% Share Region in Chinese Imports of Metal Ores
1995 2000 2005 2009
Low and middle income economies 35 41 48 52
Latin America 11 14 20 24
South Asia 3 4 12 7
SSA 5 4 5 8
Impact on Commodity Exporting Developing Countries
% Share Region in Chinese Imports of Metal Ores
1995 2000 2005 2009
Low and middle income economies 35 41 48 52
Latin America 11 14 20 24
South Asia 3 4 12 7
SSA 5 4 5 8
% Share of China in Regions Exports of Metal Ores
1995 2000 2005 2009
Low and middle income economies 2.5 5.0 13.1 24.0
Latin America 2.3 5.1 15.5 32.4
South Asia 12.0 17.6 57.7 49.7
SSA 2.7 3.4 6.3 22.7
China: Driving the Commodity Super Cycle
• Rising prices over a decade or more
• Driven by large developing country
• Previous super cycles:
late 1800s early 1900s: when USA was expanding
1945 – 1975: post war reconstruction in Europe and
Japanese expansion
Challenging The Resource Curse?
GLOBAL DRIVERS DOMESTIC DRIVERS
Terms of Trade Dutch Disease
Price Volatility Enclave Mining
Low elasticity of Demand Governance and conflict
Challenging The Resource Curse?
GLOBAL DRIVERS China’s Impact
Terms of Trade
Price Volatility
Low elasticity of Demand
Challenging The Resource Curse?
GLOBAL DRIVERS China’s Impact
Terms of Trade Reversal in TOT
Price Volatility Financialisation + Savings
Low elasticity of Demand Large volume compensatesIncreased Export Revenues
Opportunity for Resource Rich Countries?
• Prices will remain high for a decade or more
• Exports to China will grow
• Mining brings FDI (particularly in Africa)
• Domestic policy becomes essential
Disruptive Development?
Commodities CAN serve as an engine of growth
BUT
Requires Intense Policy Guidance