Why is China such a force in the global commodities markets?
Two words explain it simply: size and growth. China is the most populous nation on the planet, with more than 1.3 billion people. It is also one of the most rapidly developing countries, logging 8.7% growth in its gross domestic product in 2009. The major established commodity markets in North America and Europe are smaller in terms of population, and their economies are expanding more slowly, if at all. So emerging markets in general - and China, in particular - are seen as the sources of the greatest potential growth in demand, as well as critical players in the competition to buy or secure those resources today. Those are both key factors in determining prices.
Is it possible to quantify how much of global demand for raw materials comes from China?
There is a significant amount of guesswork and estimation that goes into quantifying China's share of global demand for commodities. Moreover, information about demand from the rest of the world is imperfect, though U.S. and European data are often considered quite reliable and the data's shortcomings are relatively well-understood. Still, many analysts pour a great deal of work into trying to estimate how much China is consuming compared to the rest of the world. For instance, IHS Inc. says that China's share of global oil demand will be 10.6% in 2010, compared to 8% five years ago.
Why do the commodities markets pay such close attention to China's economic and monetary policy?
China's policies have the potential to speed up or slow down economic growth in the country, and government actions also can encourage consumption of some commodities and discourage others. Therefore, commodities traders and analysts look intently for signs of what China might be doing, and how that might affect the markets. That is likely to become even more true if China's share of global demand for commodities continues to grow.
Are certain commodities more apt to move on China policy changes than others?
Some commodities, such as oil and copper, are particularly sensitive to signs of faster or slower growth in China. Others, such as natural gas, are more susceptible to regional and seasonal factors, and not really driven by exports to China. Still, it's not unusual for a wide range of commodities to move up or down based on what is happening in China because its influence extends beyond simply what commodities it is producing or importing. For instance, Chinese policies can also affect the value of the U.S. dollar, which is another major force in commodities markets.
Is China's role likely to increase as its economy continues to modernize?
If all else remains the same, China's influence on commodities markets is likely to increase for years to come. But there are also risks to extrapolating too much from that assumption, particularly over time. For instance, China's demand for energy is likely to grow, but China and many other countries are searching for alternative energy sources and ways to conserve energy, which could tilt the balance of power among various sources of energy, e.g. oil and natural gas. Also, as China's economy matures, growth will eventually slow and other countries, such as India, could play a larger role themselves.
What are the risks to commodities prices this year emanating from China?
China is trying to strike a delicate balance between encouraging enough growth to promote domestic stability and social cohesion, and keeping the economy from overheating or inflating into a speculative bubble. One risk is that the Chinese government is unable to maintain that balance, which could cause short-term demand for commodities to contract sharply. Any contraction of Chinese demand, whether orderly or sudden, could provoke a disproportionate reaction in the commodities markets, precisely because traders have wagered so heavily on growth in China as far as the eye can see.
Write to Liam Pleven at liam.pleven@wsj.com
There is a significant amount of guesswork and estimation that goes into quantifying China's share of global demand for commodities. Moreover, information about demand from the rest of the world is imperfect, though U.S. and European data are often considered quite reliable and the data's shortcomings are relatively well-understood. Still, many analysts pour a great deal of work into trying to estimate how much China is consuming compared to the rest of the world. For instance, IHS Inc. says that China's share of global oil demand will be 10.6% in 2010, compared to 8% five years ago.
Why do the commodities markets pay such close attention to China's economic and monetary policy?
China's policies have the potential to speed up or slow down economic growth in the country, and government actions also can encourage consumption of some commodities and discourage others. Therefore, commodities traders and analysts look intently for signs of what China might be doing, and how that might affect the markets. That is likely to become even more true if China's share of global demand for commodities continues to grow.
Are certain commodities more apt to move on China policy changes than others?
Some commodities, such as oil and copper, are particularly sensitive to signs of faster or slower growth in China. Others, such as natural gas, are more susceptible to regional and seasonal factors, and not really driven by exports to China. Still, it's not unusual for a wide range of commodities to move up or down based on what is happening in China because its influence extends beyond simply what commodities it is producing or importing. For instance, Chinese policies can also affect the value of the U.S. dollar, which is another major force in commodities markets.
Is China's role likely to increase as its economy continues to modernize?
If all else remains the same, China's influence on commodities markets is likely to increase for years to come. But there are also risks to extrapolating too much from that assumption, particularly over time. For instance, China's demand for energy is likely to grow, but China and many other countries are searching for alternative energy sources and ways to conserve energy, which could tilt the balance of power among various sources of energy, e.g. oil and natural gas. Also, as China's economy matures, growth will eventually slow and other countries, such as India, could play a larger role themselves.
What are the risks to commodities prices this year emanating from China?
China is trying to strike a delicate balance between encouraging enough growth to promote domestic stability and social cohesion, and keeping the economy from overheating or inflating into a speculative bubble. One risk is that the Chinese government is unable to maintain that balance, which could cause short-term demand for commodities to contract sharply. Any contraction of Chinese demand, whether orderly or sudden, could provoke a disproportionate reaction in the commodities markets, precisely because traders have wagered so heavily on growth in China as far as the eye can see.
Write to Liam Pleven at liam.pleven@wsj.com
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