How Much Overcapacity In China? Monstrous

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WASHINGTON – It has been said many times that the recent commodity prices collapse is due to sudden lack of demand from China. The Chinese construction and infrastructure boom is over.
China stopped buying

China’s voracious appetite for copper, iron ore, glass, cement and other basic materials that just a few years ago led world commodities prices into the stratosphere is now over.

Commodities exporters ranging from Brazil to Australia, from Chile to Zambia are suffering because their once valuable products, due to lack of strong demand, are now worth a lot less.

We know of a global retrenchment of all major mining companies, from Glencore to BHP Billiton. Vale, the Brazilian iron ore giant, will borrow $ 3 billion in emergency financing.

Is this global mining industry carnage due to only to the collapse of demand from China? May be not all, but most of it. That said, how big was China’s boom? And, more relevant, how big a bust do we have now?

We know that China’s once insatiable appetite for all commodities was part of a gigantic investment and construction drive aimed at countering the ill effects of the 2008 recession that originated in the US. We know that this drive led to the creation of massive over capacity in many sectors. But how much overcapacity are we talking about?

Well, here is an example, reported in a WSJ editorial;

“Canadian scientist Vaclav Smil captures the scale of this [construction] folly with a statistic. From 2011 to 2014, China produced 6.6 billion tons of cement, compared to the 4.5 billion tons the US used over the entire 20th century”.

More cement than what the US used in a century 

Got that? In 3 years China used more cement than what America, the largest world economy, used in a century!

Even allowing for a much larger population (1.3 billion Chinese, versus 300 million Americans) that may have needed (in a real hurry, I might add), more housing, more commercial properties, and more new highways, these figures are staggering. No wonder that the Chinese rate of demand for more and more raw materials could not be sustained.

No more buying 

If we look into the future, after this gigantic raw materials indigestion, it is clear that China is not just taking a pause. It will take years before China will be able to cut down over production to levels more in line with actual domestic needs. Therefore, it is clear that China will not go back to the absurd buying spree that created the now defunct commodities boom.

And this means that all commodities producing countries better revise their business development models. Their future well-being will no longer be driven by Chinese demand.

Ripple effects 

And beware of the ripple effects. Large and small commodities exporters represent now a much bigger percentage of the global economy. With their economies down, expect these countries to buy  much less from America, Europe or Japan. This will not lead to a major global crisis. But it will slow everybody down. Therefore, 2016 will not be a good year for the world economy.

US will be hurt 

And there is no way that the US, thus far the best performer among many developed world mediocrities, will be able to insulate itself from these negative currents. Does this mean recession? May be not. At the moment, though, it is safe to predict even slower growth.

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