Chinas Metals Demand and Commodity Prices: A Case of Disruptive Development? Masuma Farooki EADI/DSA Conference – 19 to 22 September 2011, York

Commodities in Development: Resource Curse: 1.Terms of trade 2.Elasticity of demand 3.Price volatility 4.Enclave nature of mining 5.Dutch disease 6.Conflict and governance

Commodities in Development:

Drivers of Commodity Price Boom Demand from Developing Countries: China Supply constraints Financialisation of Commodity Markets

Drivers of Commodity Price Boom Demand from Developing Countries: China Supply constraints Financialisation of Commodity Markets

Chinas Commodities Demand 1.Why has Chinas growth been commodity intensive? 2.How does this increase in physical commodity demand translate into exports from developing countries? 3.Can the higher commodity prices negate the negative relation between commodities and development?

Chinas Commodity Intensive Growth Structural Change impacts Commodity Intensity

Percentage Share of Costs of Minerals/Extractive Sector in Industrial Production and Per Capita Income (PPP) 2004

Chinas Commodity Intensive Growth Large Country Effect Developing Country Effect Trade Effect

Large Country Effect 1.3 billion people (20 % of global population) Small country effect has to be dropped Volume compensates for low elasticity of demand

Developing Country Effect Manufacturing is the dominant sector (47 % in 2009) Infrastructure: Expansion not maintenance Urbanisation: Increasing not stabilising Growth in Income: low income groups dominate demand

GDP Growth vs. Resource-intensive GDP Growth Time Period Consumption per capita GDP per Capita Growth (%) AluminiumCopper Chinas Per Capita Metal Consumption and GDP Growth Rates ( )

Trade Effect Domestic Production < Domestic Consumption

Impact on Commodity Exporting Developing Countries % Share Region in Chinese Imports of Metal Ores Low and middle income economies Latin America South Asia34127 SSA5458

Impact on Commodity Exporting Developing Countries % Share Region in Chinese Imports of Metal Ores Low and middle income economies Latin America South Asia34127 SSA5458 % Share of China in Regions Exports of Metal Ores Low and middle income economies Latin America South Asia SSA

China: Driving the Commodity Super Cycle Rising prices over a decade or more Driven by large developing country Previous super cycles: late 1800s early 1900s: when USA was expanding 1945 – 1975: post war reconstruction in Europe and Japanese expansion

Challenging The Resource Curse? GLOBAL DRIVERSDOMESTIC DRIVERS Terms of TradeDutch Disease Price VolatilityEnclave Mining Low elasticity of DemandGovernance and conflict

Challenging The Resource Curse? GLOBAL DRIVERSChinas Impact Terms of Trade Price Volatility Low elasticity of Demand

Challenging The Resource Curse? GLOBAL DRIVERSChinas Impact Terms of TradeReversal in TOT Price VolatilityFinancialisation + Savings Low elasticity of DemandLarge volume compensates Increased Export Revenues

Opportunity for Resource Rich Countries? Prices will remain high for a decade or more Exports to China will grow Mining brings FDI (particularly in Africa) Domestic policy becomes essential

Disruptive Development? Commodities CAN serve as an engine of growth BUT Requires Intense Policy Guidance