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Report: China's Demand Is Not Driving Up Commodity Prices

Report: China's Demand Is Not Driving Up Commodity Prices

04 August 2013

GLOBAL - A new report debunks the commonly accepted notion that demand from China is driving global commodity prices.

“There is a common assumption that China’s rapid economic growth has resulted in its having an increased demand for and consumption of world commodities, and that China’s increased consumption has driven up global commodity prices,” according to Kel Kelly, GROWMARK economic and market research manager, and author of the report. “Our analysis shows the inverse is true.”

The Growmark report, “Demand from China: Fact or Fiction? Why China is not the real driver of commodity prices” shows analyses demonstrating China’s lack of influence on commodity prices, concluding China is not responsible for the majority of the price increases experienced by most commodities over the past decade. Rather, Wall Street investors are responsible for the rise in commodity prices.

The report shows that China’s rapid growth comes from its rapidly increasing production of goods, with the result that China now produces and supplies more commodities than most other countries. China consumes mostly its own supply of commodities, not the remaining world supply. It is, in fact, a net contributor to world commodity supply, not a net taker. As a result, it has thus contributed to lower, not higher, world commodity prices.

As a minority purchaser of commodities from markets outside its own country, China has a minimal impact on world prices. Total purchases of commodities by all other market participants in non-Chinese markets are greater than China’s, and thus have a greater effect on prices than does China’s purchases in those markets.

China rice terrace

It is important to understand that China trades its own commodities locally in Chinese renminbi; yet the markets and prices commonly perceived to be affected by China are US dollar markets outside of China, where prices are not directly affected by Chinese renminbi markets, the report indicates.

The report also offers the following analyses demonstrating China’s lack of influence on commodity prices:

  1. other countries have a stronger relationship between their commodity imports and world commodity prices than China has;
  2. although prices of commodities traded in dollars have risen, U.S. exports of commodities have not generally increased;
  3. there is, for most commodities, no relationship between exports of U.S. commodities to China and their respective prices; where loose relationships do exist, price movements are still more closely tied to other market participants than to China; and
  4. many commodities that China does not buy have experienced the same volatility as commodities it does buy, indicating that other factors besides Chinese purchases are driving commodity prices.

The “demand from China” theory fails to explain how all commodities collapsed together during the 2008 financial crisis, while Chinese purchases did not, and, why most commodity prices tend to move in sync, even though they have different fundamentals.

The report explains these phenomena by pointing to a different force, new to the commodity markets, that affects commodity purchases on a much larger scale than does China: the horde of Wall Street banks, broker/dealers, securities firms, hedge funds, and exchange-traded funds investing in commodity futures.

Wall Street is now responsible for the majority of all spending, purchases, and trades in the commodity futures markets, which, in turn, bid up cash prices through arbitrage. It is not physical “demand from China,” but instead monetary demand from Wall Street that drives up prices. 

Further Reading

You can view the full report by clicking here.


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