Implications of Weakening Chinese Commodity Demand

UPDATED: Several commodities may see weaker demand as China's economy shifts

Abraham Bailin 31 May, 2012 | 10:31AM
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Through sustained rampant growth, China has forged itself a place as an economic powerhouse in the international community. Typifying this trend, the past 10 years saw annual real GDP growth in China consistently range between roughly 9% and 14%. However, few, if any, economies can sustain such growth forever. Today, we believe China stands at the precipice of a major economic inflection.

A weak global economy has left the traditionally export-driven nation without a reliable outlet for extrinsically driven growth. The most recent additions to GDP have come from fixed-asset investments, but it seems that those avenues, too, have been exhausted. With the passage of the nation's 12th five-year economic plan, the shift toward a consumer-led economy is officially underway. The shift stands to take the wind out of the sails of commodity inputs relied upon throughout the nation's infrastructural binge.

Signs of a Turning Tide 
In a report last year, Morningstar senior securities analyst Daniel Rohr noted that China's gross capital formation, or GCF (investment in physical capital), had grown to an astonishingly high 50% of GDP from 35% in 2000. The trend significantly reduced the impact of household consumption on overall GDP. While the PRC's most recent quarterly economic data indicate strength in fixed-asset investment, historically reliable indicators of GCF such as steel and cement production indicate the contrary. In a more recent piece, Rohr notes that year-over-year changes in steel and cement production levels have dropped by over 50%.

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Abraham Bailin  Abraham Bailin is an ETF Analyst with Morningstar.