All eyes are on China.
Over the last 15 years, China has become the world’s factory – importing raw materials and selling finished goods to all corners of the globe – and, in the process, has been largely responsible for driving increased global demand for commodities of all kinds.
With near consistent double-digit annual growth rates, China has now become the largest consumer of commodities in the world, accounting for nearly 13% of all commodities imported; significantly higher than the next largest importing countries: the US at 10% and Japan at 8%. Including domestic production, China in 2014 consumed more than 50% of the world’s iron ore, aluminum, and nickel and 45% of the world’s supply of copper and zinc. During the period from 2000 to 2014, China grew from consuming 12% of all metals to almost 50% of the global supply.
With the Chinese economy exploding from a total gross domestic product (GDP) of about 1.2 Trillion USD in 2000 to an estimated 10.4 Trillion USD in 2014, producers and traders around the globe had found what seemed to be an unlimited market for their metals, energy, and agricultural commodities. Though offset somewhat by reduced demand in other regions, China’s voracious appetite for commodities led to increasing prices and spurred massive investment in new production resources and delivery assets around the world.
Though signs of potential trouble have been emerging over the last couple of years, it is now clear that expectations of continuing double-digit growth were misplaced and the markets are now faced with an oversupply of many commodities and production capacity – all leading to lower prices and higher price volatility. Commodities ranging from iron ore, gold, aluminum, and copper are all trading at five year (and beyond) lows, and the over-investment in global production and supply chain assets has produced a potential multi-year overhang of excess delivery capacity that will continue to depress prices and induce volatility.
Adding to the concerns for commodity producers and traders, continuing investment in developing domestic Chinese reserves and production capacity has reduced dependence on many imported commodities like aluminum and steel. While the country’s massive economic growth over the last decade has partially obfuscated the impact of this new domestic production capacity, China’s now faltering economy has slowed demand and imported commodities have been the first to feel the impacts.
For better or worse, the emergence of China as the engine of global economic growth has positioned the country as the key player in the commodities markets; and those markets will be hypersensitive to any news or rumor related to China’s economic performance. Unfortunately, given poor visibility into "real" Chinese economic indicators and performance, the unpredictable currency moves of their central bank, and China’s stated goal of moving the country from a manufacturing-based economy to one focused on consumerism, high levels of price volatility across the global commodity markets will remain for a long time.
Under these circumstances, producers, traders, merchants, and consumers need to ensure they are properly equipped and financially positioned to manage (and potentially profit from) the sudden and unpredictable price movements that will continue to occur for months or even years. Having the right systems and processes in place is key in this market. A modern commodity management solution that can optimize the entirety of the supply chain, from production to delivery, mitigate volatility risk, and better identify and quantify other potential risks is a necessity in ensuring profitability, if not survival, in today’s commodity markets. Learn more in "Top 3 Influencers in CTRM Software."