End Of China Boom Caused Commodity Prices Collapse China's bubble was created by a Government-willed gigantic stimulus that fueled demand for commodities. Now it is all over

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WASHINGTON – Global mining giant Anglo American just announced that it will downsize –in a dramatic way. It will cut 53,000 jobs. This is no surprise. It is the painful consequence of the end of the crazy China bubble.

Commodities are down

Indeed, all commodity prices are significantly down. Compared to 2014, iron ore is down 45%, copper down 25%, aluminum down 18%, and so on. And this collapse is due mostly to lack of demand from China.

If these are the painful consequences of the end of the China boom, it may be instructive to go back and see how it started.

How it all started

When China’s leaders announced a gigantic, publicly funded, stimulus package to counter the ill effects of the US-induced 2008 global financial crisis, the world applauded. “There you go. This is how you deal with this problem caused by the short-sighted and in the end stupid Wall Street crowd. This is a real fire wall. Nothing like the puny, timid package passed in Washington. You counter a major crisis with a really big package. This one will do it”.

Well, the package was big, no doubt. In fact it was so big that it unleashed a gigantic China boom. Goaded by the central authorities, the Chinese provincial Communist Party chiefs ordered massive construction projects. They built and they built “everything”: luxury housing, commercial real estate, shopping malls, infrastructure. And of course, for a while this worked out well. Companies were doing well, workers were employed, and so on.

They over did it

Yes, except that the Chinese over did it. And not just a little bit. They over did it in a grotesque, historically unprecedented way. They overbuilt everything, everywhere. And of course, in order to fuel this boom, they added too much capacity in all the sectors that supported it. Too many steel mills. Too many ships to carry what seemed to be an ever growing supply of iron ore. They augmented capacity in glass, cement, copper wire, you name it.

Boom in commodity producing countries

And this is only half the story. Until this craziness lasted, the Chinese boom fueled an economic boom in commodity producing countries. Brazil did extremely well by boosting its exports to China. Same for Australia, and many African countries.

But this Chinese debt fueled boom, induced by ill-advised public policies ordered by Beijing, had to come to an end. Simply stated, there is too much supply, not enough demand. And in the meantime, China total debt skyrocketed to unprecedented levels.

Mining companies trying to adjust

And now? Well now we see the outcome of this gigantic malinvestment. As indicated above, British mining Giant Anglo American is trying to cut its losses by eliminating 53,000 jobs. World wide the mining industry is in bad shape, and so are the countries whose growth depends on it.

China’s policies did not work

What is the lesson of this? The lesson is that Chinese policy makers are just sorcerer apprentices who believed that their smart ideas would provide effective tools that would beat a negative global trends caused by reckless American policies.

True enough, all governments around the world tried to enact measures that would limit the damage. Washington intervened massively to prevent the collapse of American financial institutions. It also bailed out General Motors, the giant car manufacturer that was already in serious difficulty before the Wall Street financial collapse. Still, while we can debate the wisdom of the counter measures, overall Washington did not make the problem worse.

The Chinese wanted to avoid the economic consequences of a financial crisis they did not create. And this is understandable. However, in their zeal, in the end they created a huge debt-fueled boom that caused a massive misallocation of capital, in China and across the world. If you just lost your mining job in Australia, Brazil or South Africa you know this.

Chinese over capacity will be sold to us

And this is not the end of the bad news from China. If you were wondering what will China do with its massive over capacity in practically every industrial sector, here is the answer. They will do their very best to sell their gigantic steel (and everything else) surplus to us, at rock bottom prices.

You see, this being China, they simply cannot shut down money-losing steel mills, this way causing massive unemployment. No, they will keep producing, at a loss if necessary, and dump the stuff here, this way causing US steel producers to go out of business.

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