Commodities: Will the Real China Demand Please Step Up?

If you're a frequent reader of MetalMiner and Spend Matters, you'd know we've been more than skeptical about real demand in China this past year. Candidly, we think that the government has been manipulating demand through public works projects, stimulus and subsidies just as much as it has been meddling in the RMB. Now, this is not necessarily a bad thing if you don a non-economics cap -- after all, the last thing we want is a billion people out of work. But such actions have certainly had an impact in propping up commodity markets worldwide. But it appears that the markets are finally betting that the last emperor really does have no commodity clothes -- at least none that he can hold up without suspenders or a belt.

According to a story in the FT earlier this week, demand in China is coming into question, throwing a kink into the plans of those who believe the country's thirst for raw and base materials will keep commodity markets up. According to the story, "China's ravenous appetite for raw materials has been the main driver of the rally in commodity markets over the past 18 months, when the price of commodities such as copper and iron ore almost tripled. But demand growth from China has been slowing in recent months, with many analysts viewing the rate of growth at the start of 2010 as unsustainable. A seasonal slowing of industrial demand for commodities has also contributed."

Leading industrial indicators are pointing in the wrong direction: "In a striking sign of the fall-off in the Asian freight market, the cost of the largest class of vessel, Capesize, which is mainly used to transport iron ore to China, has fallen below the cost of Panamax vessels, which are less than half their size and are used to transport commodities such as grains." Even though we'd like to say "we told you so" all along, what really matters from a global procurement perspective is that unless China begins to show signs of real demand, industrial commodities could be in for a downward ride worldwide, at least in the near future. Will lower prices ultimately equate with higher demand, as prices for finished products fall? Perhaps. But those sourcing from China already now that rising labor costs and a -- finally -- moderately appreciating RMB will more than make up for it.

Our bottom line is that this is yet further proof that sourcing closer to home will make more sense in 2011 than it has in over a decade.

Jason Busch

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