LESS STEEL, MORE COFFEE

China’s slowdown is having a dramatic effect on commodity prices, as the demand for materials needed to build apartments and shopping malls slows down.

The collapse in oil prices is clear for all to see, but many other industrial raw materials have also suffered from weaker Chinese growth. Demand for cement in China, for example, has dropped by 5 per cent during the past year according to Goldman Sachs. That might not seem like much, but for an economy that has been expanding at more than 7 per cent it is a dramatic number.

Prices for iron ore, the principal ingredient in steel, have slumped to their lowest levels since the aftermath of the global financial crisis in 2009. A tonne of iron ore now sells on international markets for less than US$60, compared to a high of almost US$200 in 2011.

Since May, zinc prices have fallen more than 30 per cent to five-year lows as Chinese imports have fallen by two-thirds. Zinc is used in steel vehicle parts and brass plumbing fixtures.

However, the commodities story in China is not all bad news, according to Goldman Sachs. Steel, cement and zinc are mostly used to build big fixed assets, but there is a limit to how many homes or airports are needed. As China tries to expand its consumer economy, demand for commodities such as petrol, coffee, sugar and soybeans is actually increasing.

“This pattern suggests that policymakers are, at least to a degree, successfully creating the conditions for the muchanticipated rotation in economic growth away from investment and towards consumption,” says Goldman Sachs in a report on the Chinese economy.

For investors, this could suggest long-term opportunities in the consumer economy are still valid—and may even be priced attractively.