China Research

Today, China dominates the global commodity markets by its strong demand for oil, metals and agricultural commodities. China is not only consuming an increasing portion of ores, fuels and food, but is also an important supplier of a lot of commodities, e.g. rare metals, coal and some special metals.

We can illustrate China’s role by a closer look at the world steel market. The worldwide steel production has recovered more rapidly than initially expected. In 2011, production amounted to about 1.53 billion tons of crude steel worldwide. For 2012, we forecast a crude steel production of around 1.55 billion tons. We expect a further increase of up to 1.75 billion tons for 2015. This development enhances the demand for iron ore, blast furnace, coke and steel scrap. Important impetus continues to come from China and other Asian regions. China’s output will be up to 720 million tons in the current year and close to 800 million tons in 2015. This equals the global production level of the mid nineties!  In addition, we see rising production volumes in India, Vietnam and Indonesia.

On the other hand Western European steel production is still below pre-crisis level and will only stagnate in 2013  while some Eastern European countries will show a stronger growth during the next years. Within Europe Turkey could reach a new all-time high with a production volume of up to 38 million tons in the current year. For 2015, we expect a volume of more than 40 million tons.

To fulfill the needs of the output highs of the global steel industry new capacities for iron ore are necessary. About 70 per cent of the worldwide iron ore reserves are hold by three companies (Vale, BHP and Rio Tinto). Together with capacities of Anglo-American and the captive capacities of ArcelorMittal they control the worldwide supply of iron ore. Compared to our steel production forecast another 450 million tons of iron ore per year will be needed in 2015.

Today China influences the spot market price for iron via its tremendous demand. The leading iron ore producers invest mainly to fulfill Chinas needs, e.g. Vale ordered new vessels with higher capacities ever seen primarily for the transport of iron from Brazil to China. Beside steel China holds a nearly similar position  in the markets for aluminum, copper, nickel and zinc as well as the casting of these metals. In the long-run China will become the main consumer of oil instead of the United States.

The country is the leading producer of rare metals with a production share of 97 % in 2010, needed in high-tech applications worldwide. Restrictions for exports of these rare metals via tariffs or volume constraints are not unusual in China. And even in the medium-term countries outside of China are unable to substitute these raw materials or find other suppliers. This will result in a rising production of high-tech application within China. Therefore, Western companies discuss more and more joint ventures in China to secure their raw material supply.

During October 2012  China announced a further restriction for the export of copper scrap. Holding the scrap in the country improves Chinas resource base, because it is the leading copper user worldwide.  Outside of China the reduced scrap supply  induces higher prices for scrap and via higher input costs in a second step  higher prices for secondary and primary copper. In addition, there are high inventories of copper in the Chinese  warehouse of the SHFE and higher strategic reserves of copper.

These are only a few examples for the rising importance of China in the commodity markets. But does this behavior result in an optimal allocation of resources? In our opinion it does not. With a completely free trade of commodities the market would chose the best location for the production of goods via the price mechanism. Restrictions for free trade induce higher prices than necessary.

 

 

 

 

 

 

 

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

 

 

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