When will China's hunger for raw materials start to dissipate?

Emma 8/8/11 When will China’s hunger for raw materials start to dissipate? 中國對原物料得需求何時開始下降？

Over the next decade, China’s GDP will start trending downward; by 2020, the GDP will stabilize at ~5-6% with raw materials demand slowing gradually in line with GDP growth due to completed infrastructure, construction and urban development projects and increased emphasis on the service sector Conclusion
GDP peaked in 2007 at 14% yoy in 2007 and is currently following a gradual downward trend
Noting that a correlation exists between GDP and consumption growth, we can assume that the demand for raw materials will remain strong in the long-turn but start to decrease gradually as GDP yoy continues to slow

Addressing this question requires a look at China’s current economic state and a comparison with other developed countries’ development patterns Breakdown Or, in simpler terms…

Developing nations typically undergo three growth stages—agricultural, industrial, and service-oriented; China appears to be approaching the last stage, prompting a steady demand for raw materials such as iron ore and copper as it builds up its infrastructure and cities Development Stages agriculture industry services Pre-1949
Confucianism (obedience and stability)
Population boom
Emphasis on family
1949 2007 GDP peaks at 13% yoy
Socialism
Government spending on new factories
Low-skill workers migrate to cities for jobs
Emphasis on foreign trade
1958 Great Leap Forward China is here 2011
Five-Year Plans to support development
Increased wages -> higher standard of living
Development of internal market
raw materials manufacturing domestic consumption 2020 GDP starts to stabilize at 6% yoy

China’s GDP breakdown indicates that tertiary growth is already at near-equal levels to secondary growth; we can thus assume that as China transitions to a mainly service-oriented economy, its demand for raw materials for infrastructure and city developments will continue to remain at high levels but start gradually decreasing with time Sector breakdown Primary sector Secondary sector Tertiary sector agriculture service manufacturing Tertiary growth is catching up to secondary growth As China’s service industry grows, we can expect its manufacturing industry to remain strong for some time to come as factories and low-skilled workers migrate to less-developed inland cities, prompting a demand for raw materials such as iron ore and copper, which are needed to aid infrastructure growth

U.S. historical figures indicate a strong correlation between real GDP yoy and domestic consumption growth of iron ore; we can use this data as a benchmark to predict China’s future consumption of these raw materials Great Depression & WWII China is here U.S. comparison 1905-1928: GDP ~4% Consumption ~17% 1985-2008: GDP ~2-3% Consumption ~1% 1947-1985: GDP ~3-4% Consumption ~8%

A look at historical figures for raw materials demand and GDP growth reveals volatile, fast growth in the past up until 2007 followed by slow decline in the past couple years; we can expect this downward trend to continue

The U.S.’s ratio of iron ore consumption growth over GDP peaked at around 2.3% in 1960 and began declining; China could currently very well be experiencing the same downtrend Extremely volatile, ratio ~4x Ratio ~1.5x Ratio ~0.5x Great Depression & WWII China is here

China’s ratio of iron ore demand growth over GDP reveals correlations between the two figures that we can use to compare against the U.S. Currently, the ratio of imports and production growth over GDP averages 2.5x ~2.5 Moving average

Comparing the U.S.’s historical GDP per capita with its consumption of iron ore reveals a strong demand for raw materials during early growth stages (when GDP per capita remains low) and declining consumption rates when GDP per capita begins to climb Consumption at very low levels Consumption very volatile Consumption still rather volatile in early phase, then starts to decline slightly China is here GDP per capita at fairly low levels with slow growth GDP per capita soars GDP per capita begins its climb

Comparing China’s GDP per capita to a developed nation such as the U.S., we note that China still has much potential for growth and currently its PPP currently appears to be on a fast upward trend; if we compare China’s history with that of the U.S., we can assume that China’s demand for commodities should be on a downward trend Consumption growth very volatile w/ signs of slight decline GDP per capita at low levels with little growth GDP per capita starts to climb gradually, picking up speed GDP per capita soars

In addition to GDP growth and GDP per capita levels, we can also look at past and present China’s Five-Year Plans to gauge overall development progress Five-Year Plan

Appendix

Exports to decrease as domestic consumption increases (2006-2015) Appendix 1

When will China's hunger for raw materials start to dissipate?

by Emma Tzeng on Aug 07, 2011

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When will China’s hunger for raw materials start to dissipate? — Presentation Transcript

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