Find below the meat of yesterday’s Credit Suisse report which declares the “commodity super cycle” dead. If you take just one point from this analysis it should be this: China can keep growing at 7-8% without Australia benefiting one jot. And remember, this is the optimistic scenario for China. The pessimists see the transition to internally-led growth as far more damaging. Thanks to Zero Hedge, which has graciously permitted this cross-posting.
Credit Suisse: Can China’s mighty demand for commodities return?
In this note, we ask whether China’s mighty demand for commodities will return in the medium term. We think the answer is “NO.”
The golden age of infrastructure investment is behind us now.
The golden age of the housing boom is behind us now.
The golden age of exports is behind us now.
The golden age of policy stimulus is behind us now.
but…
One more leg of urbanization is expected.
Further acceleration in policy housing is likely.
still…
Trend growth in the next decade is projected at 7% to 8% versus 10.7% in the past decade.
Growth engines will likely shift from exports and infrastructure to consumption.
which means…
It should take less commodity consumption for each unit of GDP.
1) The golden age of infrastructure investment is behind us now.
After ten years of very aggressive build up of infrastructure, the penetration of highways, railways, airports and power stations has surged. Infrastructure investment is down by 25% in the 12th five-year plan from the 11th five-year plan, after adjusting for inflation. The actual moderation could be much bigger, in view of the very aggressive infrastructure investment by the local governments as part of the fiscal stimulus in 2009.
2) The golden age of the housing boom is behind us
Home ownership in China has reached 67% in the urban sector, above the world average now, and would be much higher if the rural area were included. Housing prices are getting out of reach for those who rely on a regular salary. An average person in China needs to spend ten years of salary to pay for an average apartment, versus the world’s average of about six years. The affordability ratio for local salary earners in most tier 2 and tier 3 cities is not much better.
3) The golden age of exports is behind us
Cyclically, exports seem to be on a rebound, but structurally, China’s competitiveness has been weakened because of surging salaries among the migrant workers and continued appreciation of the RMB. It may take ten years before the legend of the “world’s factory” disappears, but the best times are certainly behind us.
4) The golden age of policy stimulus is behind us
Beijing may launch some minor fiscal subsidies for consumption and reshuffle the tax code. Restrictions on bank lending has eased a little too. But there is no way that the government will launch another massive stimulus similar to what it did in 2009. The consensus among the decision makers is that the package of stimulus in 2009 did more harm than good to the long-term sustainability of growth.
What is not over and what may accelerate in the next few years?
1) Urbanization has another leg to go.
The industrialization model in China is changing. Over the past two decades, industrialization and modernization has been done through funneling rural labor to the coastal areas and export industries. In the next two decades, we believe industrialization and modernization will take place locally, at the village level. That would create new needs for commodities.
2) Policy housing construction will likely accelerate.
The central government realizes that high housing prices have become a source of social instability, so it is committed to provide subsidized housing to its citizens, with a target of building 36 million units during the 12th five-year plan (2011-2015). Progress was disappointing last year, as local governments have neither the money nor the incentive to deliver. We think policy housing construction is likely to accelerate over the next two years, though it is not clear who will pay the bill at this moment.
The big picture is that China’s trend growth is expected to slowdown to 7% to 8% over the coming decade, from 10.7% recorded in the previous decade. As the economy shifts its growth engines away from infrastructure, construction and exports toward consumption, especially service consumption, the propensity of demand for commodities is bound to decline. Getting a massage simply does not use as much steel as building an airport. In 2011, it took 71 million tones of steel for one percentage point of GDP growth – that is unheard of in the world’s modern history. We project that the ratio should moderate to 30-40 million tones for every percentage point of GDP growth by 2020.There will be cyclical ups and downs, which may affect China’s demand for commodities and commodity prices, but we think China’s supercycle for commodities is behind us.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
