It’s just growing pains. China’s stock market has plunged by more than 15 per cent in the first two days of this week, and others around the world have fallen with it. Aside from stirring memories of 2007, it seemed a bad omen for crucial climate negotiations in Paris in December.
China’s historic agreement to rein in its greenhouse emissions by 2030 is central to success there, so could financial crisis put its environmental concerns on hold?
On the contrary, say observers: the week’s events reflect what made the 2030 pledge possible. “This round of economic slowdown is part of China’s effort to rebalance its economy to a less energy- and CO2-intensive one,” says Li Shuo of Greenpeace China.
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The country became prosperous, and the world’s largest CO2 source, by investing in manufacturing and electric power. But to keep boosting prosperity – especially for 300 million discontented urban migrants who missed out – China, like all rich countries, must shift to an economy governed by consumer spending, innovation and service industries. That means less CO2. China’s decision in 2013 to make that transition by 2022 led to its emissions pledge in 2014. So that is unlikely to change now, says Li.
In fact, this week’s crash was mainly a speculative bubble bursting, say China watchers. But in line with the country’s economic changes, manufacturing, coal and oil were the worst-hit sectors – continuing a long-term decline – whereas service industries are fine.
Route to growth
“China sees diversifying away from heavy industry and toward clean-energy sources as key to future economic growth,” says Fergus Green of the London School of Economics. “That won’t change just because of some short-term financial market woes.”
Instead of abandoning pledges to cut CO2 emissions at the first sign of economic trouble, under China’s new growth model, less CO2 points the way out of it.
And rather than climate, this week’s financial turmoil could point to another global problem: continuing instabilities in the closely coupled world financial system that propagated the 2007 crash. More evidence emerged last month that market crashes self-organise when investors overreact, copying each other rather than responding to outside information. This week’s events were a reminder of how easily such actions can spread.
China’s economic evolution will continue to affect financial markets as its one-party system tries to curb reluctant industries vested in the old economy. The fact that global markets remain closely connected could become the real problem.
China is increasingly using recycled steel, pressuring iron-ore prices and global miners
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China’s scrap production currently amounts to around 10% of its total steel output, compared with two-thirds for the U.S. Analysts expect its scrap production to start taking off toward the start of next decade.Photo: REUTERS
The world’s biggest producers of iron ore have a problem, and it lies in the steel that has already gone into China’s cars, bridges and skyscrapers.
Over the past decade, China has accumulated more steel than any other economy in the world. And because steel can be endlessly recycled, the country’s steelmakers are likely to turn increasingly to scrap instead of the iron ore mined by the likes of BHP BillitonLtd.BHP3.52%, Rio TintoRIO1.20%PLC and Anglo AmericanAAUKY0.58%PLC.
On Tuesday, BHP Billiton, the world’s biggest miner, lowered its long-run forecast for peak China steel demand to between 935 million and 985 million metric tons from one billion to 1.1 billion tons. China’s annual production is currently at about 800 million tons.
This historic glut of Chinese steel, and concerns over the country’s economic prospects, have hurt prices for iron ore, the biggest ingredient in steelmaking. The commodity has fallen to roughly $50 a ton from $190 a metric ton in 2011, squeezing the profits—and share prices—of the world’s biggest mining companies. The S&P mining index has declined to 18.33 from above 70 over that stretch.
China accumulated so much steel so rapidly that the total amount of steel in the economy and available for recycling now stands far beyond the level that would be typical for an economy its size, at around five tons per capita, according to analysis by Morningstar Inc.
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In adjusted gross domestic product per capita, China now matches Japan’s level of development in 1968. At that time, the Japanese economy had 2.9 tons of steel per capita. A comparison with the U.S., which was at China’s current level in the 1940s, isn’t relevant because American cities are more horizontal and have more wood-based homes.
China’s appetite for iron ore led global mining companies to invest billions in new mines during the last decade, which are now contributing to the oversupply as demand slows. From Rio Tinto and BHP Billiton’s massive open-pit facilities in the Australian desert to Anglo American’s 330-mile slurry pipeline in the Brazilian jungle, companies bet big on massive mines, railroads and ports.
Global capital spending by miners surged from around $35 billion in 2000 to over $200 billion in 2012, before slipping back to around $150 billion, according to SNL Metals.
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On Tuesday, after BHP reported an 86% dive in profit for the year ended in June, CEO Andrew Mackenziesaid the mining company expects China’s broader economy to pick up in the second half, meeting its 7% overall growth for 2015.
Interest-rate cuts, along with moves to support the property market and infrastructure spending, should buttress growth for the rest of the year, he said. Despite the reduced outlook for peak steel demand, Mr. Mackenzie said China’s leaders had a clearly articulated strategy, and that his company had adapted accordingly.
But as construction cools in China, the country is starting to export more of the steel it makes: its exports increased 27% during the first seven months of the year, to 62.1 million tons, and are expected to top 100 million tons this year, up from 53 million tons in 2013, according to Global Trade Information Services.
At some point next year, Chinese steel exports will surpass the total production of the world’s second-biggest steelmaker, Japan.
And in the next decade, as the country’s consumers and businesses start recycling their first generation of containers, cars and appliances, the steel glut will be compounded.
China’s scrap production currently amounts to around 10% of its total steel output, compared with two-thirds for the U.S. Analysts expect its scrap production to start taking off toward the start of next decade.
Surging Chinese exports have contributed to global oversupply, diluting steel prices around the world. In the U.S., steelmakers have filed three requests for protective import tariffs on steel from China and other countries. U.S. SteelCorp.X1.88%and ArcelorMittal,MT0.92%two of the biggest steelmakers in the U.S., have closed plants and laid off thousands of workers.
“China is moving from commodity importer to exporter,” Ugur Dalbeler,CEO of Turkish steelmaker Colakoglu Metalurji, said in an interview. “And it’s a problem every steelmaker outside of China now has to cope with.”
Automobiles production in mil veh 23 2 (ever seen a russian Lada? it was a Fiat copy)
crude oil production in mil ton 210 620?
Interesting that FSU kept 50000 tanks while china only has 8000-10000
Major regions that consume aluminum
In the last part of this series, we looked at the major countries that produce aluminum. Now, we’ll look at the major countries that consume aluminum. The demand in these regions is a key driver for the aluminum industry.
The above chart shows the major regions that consumed aluminum in 2013. As you can see, China is the biggest consumer. It consumes almost half of the aluminum that’s produced globally. However, this isn’t surprising. China is the biggest consumer of most industrial commodities. Chinese demand guided the global rally in commodities.
Interestingly, China isn’t a big aluminum exporter. This is in contrast to the steel industry. Cheap exports from China is the biggest risk for the global steel industry. Why isn’t China a big aluminum exporter? We’ll answer this question in more detail later in this series.
Europe is the second biggest consumer
Europe is the second biggest aluminum consumer. It accounted for ~16% of global aluminum consumption in 2013. Constellium (CSTM) is a major aluminum fabricator in Europe. It reported lower-than-expected earnings in its third quarter results. Recently, the stock touched its 52-week low.
North America’s aluminum consumption accounts for 12% of global consumption. Major aluminum producers—like BHP Billiton (BHP) and Rio Tinto (RIO)—have a presence in North America. Alcoa (AA) is the largest aluminum company in North America. It’s a top holding for the SPDR S&P Metals and Mining ETF (XME).
Japan is also a major aluminum consumer. In 2013, Japan accounted for ~4% of global aluminum consumption.
In the next part of this series, we’ll discuss the US aluminum industry in more detail.
China Remains a Key Commodities Player, Despite Waning Appetites
Slowdown after heady growth still leaves China as a big buyer of oil, gold, cotton and other resources
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Customers inspect necklaces at a jewelry store in Henan province, China, earlier this month. A huge Shanghai gold trade in July was seen as evidence of the country’s rising influence.Photo: Reuters
The fear that China’s appetite for commodities, from copper to coal, is falling after a decade of breakneck growth has sent prices tumbling, but the country’s sheer scale in these markets means that China will continue to shape them in the long term, even if at a slower speed.
China now buys about an eighth of the world’s oil, a quarter of its gold, almost a third of its cotton and up to half of all the major base metals. Its buying power has made the country integral to global commodities trading, influencing everything from prices to the hours traders work. While analysts predict a slowdown in the growth of Chinese commodity demand, they believe the country’s clout in the market isn’t likely to wane.
Commodities have fallen sharply in recent days, extending a summer of declines, amid concerns that a slowdown in China’s economic growth will sap the demand that drove markets through more than a decade of gains. China’s voracious consumption amid double-digit annual economic growth also encouraged a glut of new supply, from fertilizers to gold.
Many analysts say the market is wrong: Chinese demand for commodities isn’t falling.
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“If you look at Chinese commodity imports over the last few months, they’ve actually been quite strong,” said Tom Pugh,a commodities economist at Capital Economics. “A lot of it is just that people thought China would continue to grow at 10% a year, ad infinitum, and now people are just realizing that’s not going to happen.”
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Chinese gross-domestic-product growth is slowing, and economists widely doubt China achieved the 7% annual pace reflected in its official figures for the second quarter, with some thinking the rate might be as little as half that. The drop is cutting into a key source of expected demand.
The U.S. Energy Information Administration believes that, despite a recent slowdown in Chinese oil-consumption growth, the country will still account for more than a quarter of the increase in global oil demand this year. China accounts for 46% of copper consumption currently, after notching some 7.5% in compound growth in demand every year from 2010 to 2014. Deutsche BankAGDB2.72%now estimates this will fall to 3% a year up to 2020. Growth in its annual consumption of aluminum will slow to around 5% or 6% in the next 10 to 15 years, down from the 8% to 10% growth of recent years, the bank says.
Miners, refiners and drillers overestimated global demand growth, in particular from China, and went on an expansion spree that has thrown extra capacity onto the market.
Between 2015 and 2020, China is expected to drive the near-10% increase in demand expected for potash, a fertilizer with a $20 billion-plus market. But potash supply is expected to grow by over 30% during that period, according to Scotiabank.
As China moves from a manufacturing- and export-based economy to one that relies more on consumption, analysts are working out which commodities will benefit and which will suffer. So-called soft commodity imports, such as coffee and cocoa, could be winners, thanks to a rise in average wealth among the Chinese people and subsequent shift toward higher-quality consumer goods.
China’s influence on commodities prices will also come through its exports. The country’s slackening demand for some metals and its falling currency—which makes Chinese goods cheaper internationally—will encourage more commodity exports from a country more typically associated with bringing them in. In the first seven months of the year, Chinese aluminum exports climbed 28% to 2.87 million metric tons, while exports of steel products were up 27% to 62.13 million tons, according to figures from Citi Research.
In recent years, China has come to shape the very way in which commodities are bought and sold, traditionally the preserve of financial centers such as London and New York.
Late last month, the price of gold fell sharply, to a five-year low, within minutes of Asian markets opening. That came after almost five metric tons of gold—close to $200 million of the metal—was sold on the Shanghai Gold Exchange, according to ANZ Bank.ANZBY2.03%The trade was seen by market participants as a key moment reflecting how China had moved Asian commodity markets away from just following the overnight pattern of U.S. and European trading.
Activity on Chinese exchanges has jumped. Trading in commodities such as steel, zinc and aluminum drove volumes on the Shanghai Futures Exchange up 31% last year from 2013, according to the Futures Industry Magazine, a trade publication. Gold volumes on the Shanghai Gold Exchange rose 44% year-on-year in July, to 316 tons, precious metals’ dealer Anthem Vault said.
China is also pushing its way into commodities trading in the centers that have long dominated it. This June, Bank of ChinaLtd.BACHY-0.34%, one of China’s big-four state-owned lenders, became part of the century-old daily rate-setting program known as the Gold Fix, in which a group of banks set the London Bullion Market Association gold price, a benchmark for the industry. In 2012, the London Metal Exchange was sold to Hong Kong Exchanges & ClearingLtd.03884.37%, muscling out U.S.-based Intercontinental ExchangeInc.ICE3.06%
Banks and funds across Europe are acknowledging the increased action in China by dedicating staffers to stay up late to monitor those markets.
“There’s a lot more trading going on at night,” said a London-based trader at Sucden Financial.
In London, investors are also paying more attention to trading between 2 and 6 p.m. London time, when China-based night traders log on to the London Metal Exchange.
“The volumes are 20 times higher than what you’d see the rest of the day,” said Vivienne Lloyd,a metals analyst at Macquarie Group.MQBKY3.00%“We’re saying to our clients: You’ve got to be active at that time.”
The effects of Chinese demand for commodities will be felt far beyond financial markets. Billions are expected to be spent in Canada, as the country rolls out energy infrastructure, like pipes and terminals, to send its oil and gas to China and the rest of Asia. Commodities account for eight of Australia’s 10 biggest exports, much of which goes to its largest trading partner, China.
Earlier this month, Steve Letwin,the chief executive of gold miner IamgoldCorp.IAG-10.49%, was reading through his emails when he saw an analyst report saying Chinese gold demand had fallen by 1.4% in the first half of this year. While this number “bothered” him, Mr. Letwin said the world’s biggest buyer of gold will remain hard to ignore.
“China is there for the long term. They are pretty entrenched,” he said.
—Alistair MacDonald and Katherine Dunn contributed to this article.
The World Struggles to Adjust to China’s ‘New Normal’
Transition from smokestack industries to services and consumers confounds leadership, rattles markets
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China wants services, consumer spending and entrepreneurship to drive growth. Shown, shoppers walk by a shoe display in Beijing.Photo: ROLEX DELA PENA/European Pressphoto Agency
China’s leaders have warned their people they need to accommodate a “new normal” of economic growth far slower than the rate that propelled the economy into the world’s second-largest in the past two decades.
Now, the rest of the world also needs to get used to the new normal: a China in the midst of a tectonic shift in its giant economy that is rattling markets world-wide.
The slowdown deepening this year is part of a bumpy transition away from an era when smokestack industries, huge exports and massive infrastructure spending—underpinned by trillions in state-backed debt—powered China’s seemingly unstoppable rise. Today, debt has swelled to more than twice the size of the economy, and some of those industries, such as construction and steel, are reeling.
Instead of them, China is pushing services, consumer spending and private entrepreneurship as new drivers of growth that rely less on debt and more on the stock market for funding.
Reorienting China’s massive economy, however, is proving challenging, and the difficulties are testing Chinese leaders with something they have been unaccustomed to in recent decades: a troubled economy that undermines their reputation for strong management.
China’s faltering stock market sank further on Tuesday, with the Shanghai Composite Index closing down a sharp 7.6%. The central bank, seeking to invigorate borrowing and spending, cut benchmark interest rates for a fifth time in 10 months and reduced the amount of money banks need to hold in reserve.
Amid these financial shocks, some things continue to go right in the Chinese economy. Retail sales are still climbing, up 10.5% in July from a year earlier, although the rate of growth has slowed. A string of U.S. companies, from Apple Inc. to Gap Inc., have singled out China as a growth market in an otherwise sluggish world. Chinese consumers are spending like never before on movie tickets, toothpaste, jeans and cars.
“My life is actually getting better,” said Zhu Baolian,a retired package-handler at Beijing’s Capital International Airport. The 58-year-old said the government recently fattened his pension by 250 yuan a month, about $40, giving him more spending money. “I eat well. The quality of our food and other things is improving,” he said.
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The problem is that consumer spending isn’t robust enough to replace the heavy industry and investment in infrastructure and property that powered China’s nearly 10% average annual growth for the past three decades. For that to happen, a series of wrenching changes would have to take place, from giving migrants better access to social services to breaking the dominance of state-run banks and companies in many industries.
Two years ago, the government of President Xi Jinpingunveiled a long list of planned initiatives designed to achieve many of those goals. But some of the reform plans have been left untouched as Mr. Xi has focused on a major anticorruption campaign and expanding China’s influence overseas.
As economic growth slows—with some economists predicting rates around 4% this year, well below the official target of 7%—the government has been scrambling to shore things up.
“It’s becoming a more difficult job to stabilize the economy, that’s for sure,” said an economic adviser to the government. “Earlier this year, we were expecting the economy to bottom out by now, and didn’t expect it to keep getting worse.”
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Premier Li Keqiangsaid on Tuesday that “the fundamentals of the Chinese economy have not changed, economic growth is still within a reasonable range, and positive factors supporting the real economy are increasing.”
At times, the government has appeared to lose its nerve, falling back on the same tactics it used to juice growth a decade ago, such as ordering state banks to boost lending for infrastructure projects, both in China and in neighboring countries.
Earlier this month, the central bank issued a surprise devaluation of the currency, the yuan, in a move that was read by some as a sign of desperation. When the government set out to arrest a stock-market slide in June, it first called for limiting the borrowing of money to buy shares, only to reverse itself to encourage more borrowing.
The results have been dramatic swings in the stock market and currency, amid concerns among global investors that China’s leaders don’t have control of the situation. The Shanghai Composite Index has fallen 22% in the past four trading days, on top of a slide in June and July, erasing all of its gains for the year.
The state company leading the charge to stabilize the markets has in recent days pulled back from aggressive buying of shares, according to officials close to the securities regulator. That has allowed Beijing to focus on a more urgent issue: preventing a free fall of the yuan. Sharp depreciation could trigger massive capital outflows that might further dent investors’ confidence and drag down the economy.
In recent days, officials at the People’s Bank of China have worked around the clock to monitor the yuan’s trading, both within mainland China and in Hong Kong’s market, according to people close to the central bank.
A question for many businesspeople is how attuned Beijing officials are to the risk if they fail in their quest to stabilize markets and restore confidence that they are in control.
“Has China lost control of the situation?” asked CLSA economist Eric Fishwick.He added: “The short answer is no.”
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The tumbling stock market in China has inspired some creative minds. The WSJ’s Menglin Huang looks at four unusual things Chinese investors do to bring about good fortune. Photo: Reuters
Beijing’s missteps in recent months have shaken a world that has looked to China over the past two decades as a dependable source of growth and careful economic management.
China stayed above the fray in the Asian financial crisis in the late 1990s, holding the yuan steady and avoiding competitive devaluations tried by other economies. A massive stimulus program by Beijing after the 2008 global financial crisis helped to pull the rest of the world out of the slump.
China now is exporting volatility. The CBOECBOE3.62%Volatility Index, a measure of risk in the U.S. stock markets sometimes called the fear gauge, has surged over the past week, tracking the cratering Shanghai market. This is in contrast to previous Chinese share routs that barely registered abroad.
It has been five years since China’s economy last grew at a double-digit rate. Today’s economic drag reflects how Mr. Xi’s administration inherited weighty problems that all seemed to call for a further downshift in growth: heavy debt built up by government entities, endemic corruption and worsening pollution by aging industries.
Economists were initially hopeful that Mr. Xi would emerge as a business-minded leader intent on restructuring the economy more along Western lines. But he has used his political clout to wage a campaign against corruption, expand the military and rally support for party power.
Unlike his predecessors, Mr. Xi assumed control of the economy, traditionally the domain of the premier. But his thoughts about it have emerged mostly in policy pronouncements that have lacked follow-up. He promised markets would become “decisive” in allocating resources and said that slower—but better and more sustainable—growth was the new normal.
“The simple reality is that China does not have a grand master plan for economic reform that it is steadily executing step by step,” wrote Andrew Batsonof the economics consultancy Gavekal Dragonomics in a recent report.
As troubles mounted this summer, divisions within the party elite began to rise, according to Chinese officials and government-connected scholars. China’s central-bank governor, Zhou Xiaochuan,and its finance minister, Lou Jiwei,preferred more-limited stock-market intervention, said officials with knowledge of the situation, but were overruled by Premier Li, who demanded forceful actions to support the tumbling market.
Senior party members close to one of Mr. Xi’s predecessors urged him to pay renewed attention to the economy, these people said. An unusually blunt commentary in People’s Daily, the party’s main newspaper, this month criticized unnamed retired leaders for interfering in the government and sowing division. Their attempt to retain influence “not only puts new leaders in a bind but hinders them from having a free rein to do bold work,” it said.
Investors who during good times saw Beijing’s tight control of economic levers as assurance their business interests were safe now worry that authorities could be understating problems.
Mr. Li, in his statement on Tuesday, said that as the government takes “more reform measures to encourage market vitality and improve people’s living conditions, China has the ability and conditions to achieve its annual economic growth target, which will be a big contribution to the global economy.”
Doubt about the accuracy of Chinese statistics has produced a cottage industry in developing alternative economic indicators. A measure produced by London research firm Capital Economics put growth in July from a year earlier at 4.1%, although it said once consumption is factored in, growth could be between 5% and 6%. All of the figures are well below the most recent 7% official reading of GDP growth.
Mr. Li has been quoted in a 2007 cable exposed by WikiLeaks as having his own measures for growth, such as cargo movement and loan disbursement, at a time before he became premier. One of his indicators, overall electricity demand, has risen less than 1% this year, largely because of slower manufacturing and construction; that compares with growth of more than 5% a year earlier.
Some of the slowdown reflects Beijing’s efforts to close heavy and polluting industries. By contrast, power demand from services—including real estate, financial services and transport—has grown 7.5% this year.
Demand for gasoline by China’s growing legions of drivers is part of the reason for continued growth in China, though it, too, has begun slowing as car sales also weaken.
Not many economists are backing off projections that China will overtake the U.S. in terms of total GDP, possibly within the current decade.
But China also finds itself somewhere between a poor and rich country. This is a historically difficult position—dubbed the “middle-income trap” by economists—that South Korea escaped but that has held back much of Latin America.
“China is right there, where a lot of countries start to struggle,” said Peter Robertson,an economist at the University of Western Australia, adding that the “trap” often features conflict between a political system and economic reality over how a nation’s wealth is distributed.
As leaders wrangle in Beijing, one effect of the turmoil has been a tightening of wallets for many of China’s budding entrepreneurs.
In January, when Jerry Daifounded a crowdfunding startup in Shenzhen, he said there was nothing but optimism. Entrepreneurs around him said just about any business idea was getting financing from so-called angel investors—individuals or funds that provide capital for early-stage firms before formal investment rounds. Now, things are looking tougher. “There are still many angel investors, but they are getting more selective,” he said.
Heatherm Huang, a co-founder of MailTime, a San Francisco-based startup with a way to make emails easier to use on smartphones, raised much of its early funds from Chinese investors. “Last year was crazy. There was so much money in China,” said Mr. Huang. “In some ways, things are going back to normal now.”
—Laurie Burkitt, Mark Magnier and Juro Osawa contributed to this article.
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