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COVER STORY • COMMODITIES


BIG WHEELS: A slowdown in the commodities market will have knock-on effects on industries from shipping to mining machinery


policy makers get serious about rebal-


ancing. Investment growth needs to fall below consumption growth for the econ- omy to rebalance, he wrote in a recent note. But with investment being such a large economic driver, any slowing in investment will necessitate a slowdown in overall GDP growth, likely to around 3%. “Under these conditions I don't see


how we can avoid a very nasty two or three years ahead for commodity pro- ducers,” he wrote, predicting that prices of certain hard commodities could fall by 50% or more in that time. But rebalancing may still be a long


way off for China, said Guo of CASS. Consumption outgrew investment in the first three quarters of the year, but government policies continue to favor investment. Beijing is also relying on investment to drive growth in China’s less developed west and to lessen regional economic imbalances. With such wide disagreement, the


safest bet for long-term commodities investors is to wait out this transition in hope that China's economy will stabi- lize, Beijing will set a clear course toward rebalancing and the economic outlook of


“Under these conditions I don't see how we can avoid a very nasty two or three years ahead for commodity producers" -MICHAEL PETTIS, PEKING UNIVERSITY


the US and Europe will improve. Te timing of rebalancing may not


be clear, but its long-run consequences are. Commodity prices would be unlikely to rebound beyond historic peaks for decades, as no large economies are poised to grow fast enough to take China's place driving demand. For commodity inves- tors, rebalancing is still better than the potential alternative: a China that racks up debt to the point where it destabilizes the economy and sends the country into decades of stagnation like Japan. Even if metals prices come down, Chinese firms will continue to buy up


metals assets worldwide, analysts said. From a market standpoint, “[Beijing] shouldn’t really need to worry about it,” said Ian Roper, a commodities strategist at CLSA. “It’s really more from a secu- rity or supply aspect – it makes them feel comfortable that they own it.” Chi- nese companies conducted roughly 13% of global mining mergers and acquisi- tions in the first half of the year, jumping from 7% in the same period a year prior, according to PwC. China is buying in at a time when the


market is declining, but the rollercoaster of volatile commodity prices lumbers on. “Commodities prices never move in a straight line, of course,” said Minack of Morgan Stanley. “For me, the super-cycle was a sequence of a decade where we had higher highs, higher lows, so the trend was up … Tis adjustment that I envisage is once again not a straight-line move. It might be a series of five or 10 years when we have lower lows, lower highs,” he said. Unlike a rollercoaster, the way down


will be far less thrilling. But in its bid for self-sufficiency, China ensures that wher- ever the market goes, it is strapped in and along for the ride.


China Economic Review • November 2012 39


Imaginechina


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