As China's economy shifts, commodity demand will reduce, (albeit more if the rate of growth also slows). As Supply of commodities increases, commodity prices, and the Oz dollar, will fall. By how much and over what time frame are the only variables we need worry about.
On most matters: I choose c) - NONE OF THE ABOVE.
But on this matter - Ross. China spending on resources per unit of GDP is way way way higher than the rest of the world (for most resources anyway). I cannot see this continuing if their economy markedly slows down. So China having lower growth means despite their total GDP still increasing, their demand for resources will drop. I think that is the logical conclusion *if* there is a marked China slowdown - that's the part I find hard to predict for the near future.
As China's economy shifts, commodity demand will reduce, (albeit more if the rate of growth also slows). As Supply of commodities increases, commodity prices, and the Oz dollar, will fall. By how much and over what time frame are the only variables we need worry about.
China's commodity demand is still increasing, just not at the rate it was before. The current flatness/drop in commodity prices is more due to supply increasing faster than demand than to reduction in demand.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
What people are forgetting a bit is that China is trying to engineer a huge shift in the makeup of its economy from mostly fixed-investment driven to more consumption-driven. The chances are that even if this works, it will reduce overall growth somewhat.
If it is successful with this transition, demand for commodities will grow less (not fall :-) because consumer-based growth is less resource-intensive.
If they are NOT successful with this, then they are facing even more problems than they do already (which is why they're attempting this). The more unproductive fixed investments you make, the more you kill future growth.
So to sum up, there is virtually no scenario where Chinese demand for commodities continues to grow at the same or faster pace than it has over the last few years. And at the same time, supply is increasing.
Strindbergs point is valid EXCEPT that demand for commodities has always grown over the long-term, always. We need more iron now than we did in 1990, and more then than in 1960, and more then than in 1900. So if this were the driver of price, then price would always rise always. The fact that instead commodities follow boom-bust cycles shows you that overall rising demand is not the whole story.
What people are forgetting a bit is that China is trying to engineer a huge shift in the makeup of its economy from mostly fixed-investment driven to more consumption-driven. The chances are that even if this works, it will reduce overall growth somewhat.
If it is successful with this transition, demand for commodities will grow less (not fall :-) because consumer-based growth is less resource-intensive.
If they are NOT successful with this, then they are facing even more problems than they do already (which is why they're attempting this). The more unproductive fixed investments you make, the more you kill future growth.
So to sum up, there is virtually no scenario where Chinese demand for commodities continues to grow at the same or faster pace than it has over the last few years. And at the same time, supply is increasing.
Strindbergs point is valid EXCEPT that demand for commodities has always grown over the long-term, always. We need more iron now than we did in 1990, and more then than in 1960, and more then than in 1900. So if this were the driver of price, then price would always rise always. The fact that instead commodities follow boom-bust cycles shows you that overall rising demand is not the whole story.
I think you're right.
I can at first hand attest to the truth of the first sentence. At least the part about shifting away from fixed investment.
1. Heavy-handed restriction of credit for homebuying. 2. Banning the opening of new concrete and steel plants. 3. 25%+ pullback on high-speed railway construction.
Instead a focus on investments that raise productivity at a lower resource intensity:
1. The most incredible rate of construction of metropolitan light rail in the history of the world. (While simultaneously making it less and less attractive to own a car). 2. Tertiary education! 3. I can get huge tax breaks for setting up a *service* business that looks after customers *outside* China, up to and including a 5-year tax holiday if it qualifies as "high-tech".
Also a whole slew of reforms that have the nett effect of allowing more investment offshore. By this, they are raising the business-case bar for onshore investment.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Do you see that these policies are triggering action on the ground, or is there a big disconnect between what the central planners try to engineer and what actually happens?
Do you see that these policies are triggering action on the ground, or is there a big disconnect between what the central planners try to engineer and what actually happens?
The corrupt bastards in local and provincial governments try to get around central edicts, but the central government gets its way when it really wants to.
Example: China has put a ban on the building of new golf courses in some areas. A local government down south ignored this and sold off land to a developer for a golf course. The central government waited until the golf course had been half built and then stepped in and confiscated the land, telling the developer to sort it out with the bastards who he did the illegal transaction with.
Example: The central government put on carbon emission quotas at (I think) the county level in 2010. Some counties ignored this. In November 2010 the central government went in and turned the power stations off. This caused factories to cut over to diesel generators which caused even more emissions and a diesel shortage that borked the transport system for months, but it sure got the message across and quotas were honoured in 2011. :-)
The restrictions on property development is causing real pain for local governments because they (to now) have relied to a large extent on land sales to finance their operations, buy their cars and pay for their kids' educations. The central government has been fairly aggressively reversing illegal land transactions, but it does have a fairly big problem in terms of the indebtedness of local governments to deal with now.
When you talk about resources, most of you seem so focused on Iron ore or resources related to construction. This will still play a major role in Chinas economy for along period but to a lesser degree for Australia. At the same time that some say Chinas resources booms is over, China is importing record amounts of Iron Ore, both BHP and Rio Tinto both set new records in export quotas. Prices for Iron Ore have recently spike back to $151 a ton, and seem to be floating in a range from $140-150. Where is this so called end of the super cycle? Demand is still increasing, prices have been increasing. Prices for Iron Ore are now 350% higher than in 2003 prior to the boom starting. Iron Ore is not Australias largest or most profitable export. Coal is, for which demand is growing at stratospheric heights. Chinas coal demand is expected to expand at huge rates for the next 20-30 years. Luckily Australia has one of the best quality and largest sources of coal on the planet. Coal is a resource and its growth will be massive and over a long term sustained period. China adds 4 Australias worth on power to its grid every year, most of it from coal fired power stations. On top of this we have our massive LNG and Coal seam gas resources set to reach world leading production over the next 5-8 years. Most of going to China and North East Asia. These Gas resources over the next 10 years could out strip both Coal and Iron ore to become our largest export, as Asias demand for energy expands at ever growing rates. Australias future does not lay with just Iron Ore, Australia is set to become an energy superpower over this next decade and supply Asia with huge quanties, this includes India which Is very interested in our gas fields and starting to invest heavily. China may indeed slow in time, but it has only urbanised 300 million people out of a population of 1,300 million. We have a long way to go. One thing Julia Gillard is correct on is Australia will also be a food superpower. Those 3 billion people to our north will need a lot more food as they join the middle class over the next 30 years. Presently yes the world has some economic problems to work out, but Asia is not one of those issues. Asia over the next 30 years will underpin our growth for the long term. It is indeed possible Australia could grow constantly for the next 30 years, providing a 50 years of uninterrupted economic growth, a true golden age. This is what will happen if China doesn’t collapse which is most unlikely.
When you talk about resources, most of you seem so focused on Iron ore or resources related to construction. This will still play a major role in Chinas economy for along period but to a lesser degree for Australia. At the same time that some say Chinas resources booms is over, China is importing record amounts of Iron Ore, both BHP and Rio Tinto both set new records in export quotas. Prices for Iron Ore have recently spike back to $151 a ton, and seem to be floating in a range from $140-150. Where is this so called end of the super cycle? Demand is still increasing, prices have been increasing. Prices for Iron Ore are now 350% higher than in 2003 prior to the boom starting. Iron Ore is not Australias largest or most profitable export. Coal is, for which demand is growing at stratospheric heights. Chinas coal demand is expected to expand at huge rates for the next 20-30 years. Luckily Australia has one of the best quality and largest sources of coal on the planet. Coal is a resource and its growth will be massive and over a long term sustained period. China adds 4 Australias worth on power to its grid every year, most of it from coal fired power stations. On top of this we have our massive LNG and Coal seam gas resources set to reach world leading production over the next 5-8 years. Most of going to China and North East Asia. These Gas resources over the next 10 years could out strip both Coal and Iron ore to become our largest export, as Asias demand for energy expands at ever growing rates. Australias future does not lay with just Iron Ore, Australia is set to become an energy superpower over this next decade and supply Asia with huge quanties, this includes India which Is very interested in our gas fields and starting to invest heavily. China may indeed slow in time, but it has only urbanised 300 million people out of a population of 1,300 million. We have a long way to go. One thing Julia Gillard is correct on is Australia will also be a food superpower. Those 3 billion people to our north will need a lot more food as they join the middle class over the next 30 years. Presently yes the world has some economic problems to work out, but Asia is not one of those issues. Asia over the next 30 years will underpin our growth for the long term. It is indeed possible Australia could grow constantly for the next 30 years, providing a 50 years of uninterrupted economic growth, a true golden age. This is what will happen if China doesn’t collapse which is most unlikely.
Good points here, in particular about there being more to the relationship than Iron Ore.
Coal at this stage is not a big export from Australia to China, as China has huge coal reserves. In fact we used to export more coal to China than we do now, because their coal is in the north and 10 years ago logistics in China were so bad that it was easier to coal from Australia to Guangdong than it was to get it from Shanxi province to Guangdong province. These days they have a coal railway straight across to Dalian (I think) and send it down by sea. In the future who knows what might happen with coal. I guess some people know.
Copper: Australia has copper mines that will not start production for years whose entire lifetime production is already forward sold to China (and other places). Interestingly, in at least one case, the design of the mine has been outsourced to Nanjing because they have more mining engineers available... (The things you find out in airport lounges..)
Gas, Uranium, gold....
Water. China has already run out of water. The cheapest way to import water is in the form of wheat and other food.
I have a strong feeling that agricultural land will outpace residential property over the next decade....
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Water. China has already run out of water. The cheapest way to import water is in the form of wheat and other food.
I have a strong feeling that agricultural land will outpace residential property over the next decade....
Huge tracts of unused land, more sun that we can use to produce energy, and hydroponic technology available to construct farms with constant recycled water irrigation for low ongoing costs.
Billions of people who demand food just to our north.
Sounds far fetched - but so did a lot of things a decade or two ago.
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