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Massive demand by China and other emerging countries driving up commodity prices

  A documentary recently aired by the US television network CNN compared China with a giant vacuum-cleaner sucking up the natural wealth of the planet. While the intention of the report was to denounce the illegal traffic in protected animal species, population growth and economic take-off in China have not only fed its appetite for exotic turtles but its demand for all types of commodities too.

  Since its reform process started in the early Eighties, China has grown at a spectacular rate until becoming one of the main engines of world growth. With an average annual growth close to 10% and a model of development based on industry, it is not surprising that its demand for oil and other fuels and for basic industrial inputs, such as metals, has not stopped growing.

  The case of oil is illustrative. China has been responsible for more than 35% of the increase in world crude consumption since 2000. Nowadays, it is the second largest world consumer after the United States while 15 years ago it was the fifth and was even a net exporter of crude oil. Changes in this pattern are not expected over the long term. The International Energy Agency forecasts that shortly after 2010 China will become the world’s biggest consumer of energy and that, together with India, these two countries will be responsible for 45% of the increase in energy demand up to 2030. Part of this increase in demand will be the result of sharp growth in the use of motor vehicles, which is still at very low levels in both China and India while experience suggests that it grows sharply when per capita income comes close to 10,000 dollars, a figure that both countries should reach over the medium term.

  Economic growth is also changing consumption patterns in Chinese society. Millions of Chinese have emerged from poverty and, everyday, more and more of them acquire middle-class purchasing power, especially in the cities. This growing urban middle class is gradually changing its habits. With regard to diet, for example, rice consumption is losing weight to foods richer in protein, such as meat, eggs and milk products. Average meat consumption rose from 20 kilos per person per year in 1985 to more than 50 kilos in the 2000s. Even so, this figure is far from average consumption in economically advanced countries such as Spain where people consume more than 110 kilos per person per year. In turn, increased consumption of meat yields greater demand for cereals, thus putting upward pressure on crop prices. For example, to produce a kilo of pork, the most commonly eaten in China, requires 6 kilos of cereals.

  The idea that the insatiable demand of China –and to a lesser degree that of India and other emerging countries– is the main driver of the enormous surge in global commodity prices in recent years is gaining ground day by day (see following Graphs). Nevertheless, while being a determining factor, not all the price increases (and the spectacular rises in recent months less so) can be attributed to the take-off of emerging countries.

  On the demand side, besides those countries’ growing appetite, there has been in recent years a sharp increase in the use of cereals by the biofuels industry and this also contributed to the rise in prices (see Box «Biofuels: at what price?»). With regard to supply, various factors had a greater or lesser impact on the prices of various commodities, although, most likely, they were not as important as demand factors. These supply side factors refer mainly to the effect of instability in the Middle East on oil prices and droughts in major crop producer countries, such as Australia. Many have pointed to climate change as being responsible for the more extreme and unusual weather conditions affecting farm production.

  There are those who believe that the changes in demand and supply observed in recent years (related to food habits in emerging countries, climate change and the boom of biofuels) are of a more permanent nature than other factors that may have brought about price increases in previous cycles. For this reason, they suggest that the upward trend in commodity prices may continue. Nevertheless, other analysts expect that, as in the past, supply will end up reacting to high prices and that this may satisfy the rise in demand, exerting downward pressure on prices. Finally, we cannot ignore the possibility that a speculative bubble lies behind the price rise of some commodities.

  Whatever happens to prices we will learn it tomorrow but, as of today, it is quite clear that China is eating up the world, figuratively and literally.

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