China’s Metals Demand and Commodity Prices:

A Case of Disruptive Development?

Masuma Farookim.z.farooki@open.ac.uk

EADI/DSA Conference – 19 to 22 September 2011, York

Commodities in Development: 1950-2000

Resource Curse:

1.Terms of trade

2.Elasticity of demand

3.Price volatility

4.Enclave nature of mining

5.Dutch disease

6.Conflict and governance

Commodities in Development: 2000 - 2011

Drivers of Commodity Price Boom

• Demand from Developing Countries: China

• Supply constraints

• Financialisation of Commodity Markets

Drivers of Commodity Price Boom

• Demand from Developing Countries: China

• Supply constraints

• Financialisation of Commodity Markets

China’s Commodities Demand

1. Why has China’s growth been commodity intensive?

2. How does this increase in physical commodity demand

translate into exports from developing countries?

3. Can the higher commodity prices negate the negative

relation between commodities and development?

China’s Commodity Intensive Growth

• Structural Change impacts Commodity Intensity

Percentage Share of Costs of Minerals/Extractive Sector in Industrial Production and Per Capita Income (PPP) 2004

China’s Commodity Intensive Growth

• Large Country Effect

• Developing Country Effect

• Trade Effect

Large Country Effect

1.3 billion people (20 % of global population)

•Small country effect has to be dropped

•Volume compensates for low elasticity of demand

Developing Country Effect

• Manufacturing is the dominant sector (47 % in 2009)

• Infrastructure: Expansion not maintenance

• Urbanisation: Increasing not stabilising

• Growth in Income: low income groups dominate demand

GDP Growth vs. Resource-intensive GDP Growth

Time Period

Consumption per capita

GDP per Capita

Growth

(%)Aluminium Copper

1962-1972 0.2 0.2 6.3

1973-1983 0.5 0.4 5.4

1984-1994 0.8 0.6 9.3

1995-2005 2.9 1.7 8.4

China’s Per Capita Metal Consumption and GDP Growth Rates (1962-2005)

Trade Effect

Domestic Production < Domestic Consumption

Impact on Commodity Exporting Developing Countries

% Share Region in Chinese Imports of Metal Ores

  1995 2000 2005 2009

Low and middle income economies 35 41 48 52

Latin America 11 14 20 24

South Asia 3 4 12 7

SSA 5 4 5 8

Impact on Commodity Exporting Developing Countries

% Share Region in Chinese Imports of Metal Ores

  1995 2000 2005 2009

Low and middle income economies 35 41 48 52

Latin America 11 14 20 24

South Asia 3 4 12 7

SSA 5 4 5 8

% Share of China in Regions Exports of Metal Ores

  1995 2000 2005 2009

Low and middle income economies 2.5 5.0 13.1 24.0

Latin America 2.3 5.1 15.5 32.4

South Asia 12.0 17.6 57.7 49.7

SSA 2.7 3.4 6.3 22.7

China: Driving the Commodity Super Cycle

• Rising prices over a decade or more

• Driven by large developing country

• Previous super cycles:

late 1800s early 1900s: when USA was expanding

1945 – 1975: post war reconstruction in Europe and

Japanese expansion

Challenging The Resource Curse?

GLOBAL DRIVERS DOMESTIC DRIVERS

Terms of Trade Dutch Disease

Price Volatility Enclave Mining

Low elasticity of Demand Governance and conflict

Challenging The Resource Curse?

GLOBAL DRIVERS China’s Impact

Terms of Trade

Price Volatility

Low elasticity of Demand

Challenging The Resource Curse?

GLOBAL DRIVERS China’s Impact

Terms of Trade Reversal in TOT

Price Volatility Financialisation + Savings

Low elasticity of Demand Large volume compensatesIncreased Export Revenues

Opportunity for Resource Rich Countries?

• Prices will remain high for a decade or more

• Exports to China will grow

• Mining brings FDI (particularly in Africa)

• Domestic policy becomes essential

Disruptive Development?

Commodities CAN serve as an engine of growth

BUT

Requires Intense Policy Guidance