LESS STEEL, MORE COF­FEE

Hong Kong Tatler - - Contents -

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.

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