March 19, 2011


The World's Next Great Bust: China and Commodities: China accounts for almost half the global market for metals like steel and copper, whose mining drives the world economy. What happens when China slows down? (Derek Thompson,Mar 17 2011, The Atlantic)

"I'm a China bear," [Vikram Mansharamani, an equity investor, Yale lecturer, and author of the book Boombustolog,] says. "China is exhibiting all the signs you would expect from an unsustainable boom." He first points to the housing market, where investment hit the inauspicious market of 6% of GDP -- the same mark the U.S. hit in 2006 as the bubble was bursting. What's more, outstanding loans for developers and residential mortgages in China have increased by a factor of FIVE in the last decade. Loan balances have nearly doubled in the last three years alone.

Even worse, Mansharamani says, the Chinese government has spent lavishly to create demand that never materialized. He points to ghost towns like Qungbashi, in Inner Mongolia, a city designed for 1.5 million residents, but drew only 20,000 -- hardly one percent. He points to the New South China Mall, not far from Guangzhou, which was built to handle 1,500 tenants. Instead, it houses a few dozen -- hardly one percent. This sort of one-percent success rate creates ludicrous overcapacity that is eerily reminiscent of the empty homes and strip malls lining recession ghost exurbs in Arizona and Nevada. Mansharamani sees it as the prelude to a dramatic slowdown in government spending on buildings and infrastructure.

Well, so what? you ask. What do small towns and empty malls in Nowhere, China, matter to the world economy? The answer is that one engine of the global economy in the last few years has been commodities -- metals like steel and copper and aluminium used to build cities, malls and infrastructure. Countries with commodities, like Brazil and Australia, have thrived. So have US companies that specialize in unearthing commodities, like Bucyrus and Caterpillar.

But as China goes, commodities go. China's share of world demand for leading metals like aluminium, copper, zinc, lead, nickel, and crude steel is about 40 percent, according to research obtained from Goldman Sachs. For steel, China commands nearly half the global market. (In 2000, its share of global demand for those metals was between 6 and 16%.)

Even these numbers understate the breadth of China's impact. "Think how much steel is sold to Caterpillar or John Deere for capital goods that are sent to China," Mansharamani says. "Or how much is sent to Brazil to mine iron for China. Think of the countries that get dragged down with a commodities slow-down -- South Africa, Brazil, Peru. The world shipping sector."

If China slows down even to 5% growth a year, that will take a booming commodities market down with it.

Just wait until the gold that Glenn Beck and company have been telling them to buy readjusts.

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Posted by at March 19, 2011 5:27 AM

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