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China and the Future of Commodity Prices

MANILA – There is no doubt that China’s ongoing growth slowdown has had far-reaching effects on the global economy. But its role in the sharp fall in commodity prices that has occurred since 2014 – an outcome that has been devastating for commodity-exporting countries, including once-dynamic emerging economies – is more limited than the conventional wisdom suggests. In fact, China’s slowdown is only a part of the commodity-price story.

To be sure, there is a clear correlation between Chinese GDP growth and commodity prices. In the early 2000s, when Chinese growth accelerated, commodity prices rose sharply; since China’s slowdown began in 2011, energy prices have fallen by 70%, metals prices by 50%, and agricultural commodity prices by 35%.

But the view that China’s slowdown is the main driver of the collapse in commodity prices is incomplete, at best. As new research by the Asian Development Bank shows, while China plays a significant role in commodity markets – accounting for about half of global consumption of metals, coal, and pork, for example – it is not nearly as dominant as is widely believed. China accounts for less than one-fifth of world consumption of sugar, wheat, poultry, and beef; 12% of world consumption of crude oil; and 5% of natural gas. And, in fact, some of the commodities that have experienced the largest price declines – most notably, oil (down 73%) and natural gas (down 55%) – are those in which China is a relatively minor player.

Moreover, China’s actual commodity consumption is even lower than the figures suggest. Conventional measures, instead of taking into account cross-border production chains, simply take the sum of a country’s production and net commodity imports to determine its level of consumption. But, for China, a sizeable proportion of the commodities it “consumes” is actually used in the production of goods that will be exported to the rest of the world. Indeed, almost one-third of Chinese metals demand is used to satisfy export demand. Subtracting the commodities embedded in China’s exported manufactured goods would substantially reduce China’s apparent role in these markets.