China Research

China will show a slower growth of around 7.5 per cent in 2013. This is a slight reduction of the growth rate in relation to the previous year. But even with this more moderate growth the country still dominates the global commodity markets.

In the current year, China’s share of global crude steel production will equal nearly fifty per cent. While global crude steel production expanded by only two per cent until the end of July, the Chinese production grew by around seven per cent. For the whole year we expect a growth rate of around six per cent.  As a result of an only slightly higher domestic steel demand, the exports mainly to other Asian countries and North America expanded. And in addition to the strong increase in Chinese crude steel production, the prices for iron ore came up after a decline in the first quarter of 2013.

The worldwide production of primary aluminum in the first half of 2013 shows a similar picture: high growth of nearly 11 per cent in China and a reduced generation in Europe let Chinas market share rise to nearly 43 per cent.  For 2013 in total, we forecast a growth rate of around 10 per cent. But the global market share for recycling aluminum is below the Chinese market share for primary aluminum. The main reasons for this phenomenon are underdeveloped collecting and scrap treatment activities.

On the other hand, China reduces the inventories of commodities. A good example is the development in the copper market. Chinese apparent usage of copper declined by around three per cent until the end of May 2013 caused by a reduction of net imports of refined copper. Market participants explain this reduction with a decline of unreported inventories in Chines warehouses. China had built up its copper inventories during a period of lower copper prices after the global economic crisis of 2009. We forecast that the reduction of inventories will come to an end during the third quarter of the current year. A stable or slightly increasing Chinese copper usage in the fourth quarter of 2013 will stimulate the global copper prices.

These three examples show the new role of the Chinese economy in the global commodity markets. Small changes in the domestic Chinese demand influence the worldwide price level and lead to a higher volatility in the global markets. Stagnating domestic consumption of metals or other commodities induces higher exports and pressure on production levels in other countries, mainly in Asia and America but more and more – see e.g. some flat steel products – on the Middle Eastern and European markets.

The Chinese government emphasizes its new role in the global commodity markets alternatively by a system of import taxes, export subsidies or sometimes regulation of markets (see e.g. the markets for rare earths).  On the one hand, this behavior secures the resource base of the Chinese economy. On the other hand, Chinese producers of metal products have a competitive advantage on the global markets as a result of higher metal production volumes in relation to smaller economies.

In the long run, this will lead to a reduction of production levels in some European countries and in America, because China will hold its production on a high level even in times of a lower domestic demand. Chinese overproduction will than go into export markets.

In total, China has defined its role in the world economy as follows:

a)      securing its own resource base by different kinds of protection,

b)      stimulating the exports in times of lower domestic usage of commodities
         with an crowding-out effect on foreign production

c)       which will result in a further increase in market shares.

 

 

 

 

 

 

 

Heinz-Jürgen Büchner
Vice President Economics and Research, IKB Deutsche Industriebank

 

 

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