On China And The End Of The Commodity Super-Cycle

Tyler Durden's picture

China had a massive surge in its demand for commodities over the past decade, fueled by its housing boom and infrastructure investment boom. From 2000 to 2010, China’s imports (in value terms) of iron ore surged by 42.5 times, thermal coal 248 times and copper 16.2 times. During the same period, its production (in quantity terms) for aluminum jumped by 441.8%, cement 219.5% and steel 396.0%. It is the biggest consumer in virtually all commodity categories in the world. In Credit Suisse's view, China was the key factor behind the global commodity supercycle. After a period of economic slowdown, all eyes are on China, hoping that the middle kingdom can return to its might in commodity demand. CS cuts through all the cyclical factors and asks whether China's mighty demand for commodities will return in the medium term - their answer is 'No'. As the economy shifts its growth engines away from infrastructure, construction and exports toward consumption, especially service consumption, the propensity of demand for commodities is bound to decline. Getting a massage simply does not use as much steel as building an airport.

Credit Suisse: Can China’s mighty demand for commodities return?

In this note, we ask whether China’s mighty demand for commodities will return in the medium term. We think the answer is “NO.”

  • The golden age of infrastructure investment is behind us now.
  • The golden age of the housing boom is behind us now.
  • The golden age of exports is behind us now.
  • The golden age of policy stimulus is behind us now.


  • One more leg of urbanization is expected.
  • Further acceleration in policy housing is likely.


  • Trend growth in the next decade is projected at 7% to 8% versus 10.7% in the past decade.
  • Growth engines will likely shift from exports and infrastructure to consumption.

which means...

  • It should take less commodity consumption for each unit of GDP.


1) The golden age of infrastructure investment is behind us now.

After ten years of very aggressive build up of infrastructure, the penetration of highways, railways, airports and power stations has surged. Infrastructure investment is down by 25% in the 12th five-year plan from the 11th five-year plan, after adjusting for inflation. The actual moderation could be much bigger, in view of the very aggressive infrastructure investment by the local governments as part of the fiscal stimulus in 2009.

2) The golden age of the housing boom is behind us

Home ownership in China has reached 67% in the urban sector, above the world average now, and would be much higher if the rural area were included. Housing prices are getting out of reach for those who rely on a regular salary. An average person in China needs to spend ten years of salary to pay for an average apartment, versus the world’s average of about six years. The affordability ratio for local salary earners in most tier 2 and tier 3 cities is not much better.

3) The golden age of exports is behind us

Cyclically, exports seem to be on a rebound, but structurally, China’s competitiveness has been weakened because of surging salaries among the migrant workers and continued appreciation of the RMB. It may take ten years before the legend of the “world’s factory” disappears, but the best times are certainly behind us.

4) The golden age of policy stimulus is behind us

Beijing may launch some minor fiscal subsidies for consumption and reshuffle the tax code. Restrictions on bank lending has eased a little too. But there is no way that the government will launch another massive stimulus similar to what it did in 2009. The consensus among the decision makers is that the package of stimulus in 2009 did more harm than good to the long-term sustainability of growth.

What is not over and what may accelerate in the next few years?

1) Urbanization has another leg to go.

The industrialization model in China is changing. Over the past two decades, industrialization and modernization has been done through funneling rural labor to the coastal areas and export industries. In the next two decades, we believe industrialization and modernization will take place locally, at the village level. That would create new needs for commodities.

2) Policy housing construction will likely accelerate.

The central government realizes that high housing prices have become a source of social instability, so it is committed to provide subsidized housing to its citizens, with a target of building 36 million units during the 12th five-year plan (2011-2015). Progress was disappointing last year, as local governments have neither the money nor the incentive to deliver. We think policy housing construction is likely to accelerate over the next two years, though it is not clear who will pay the bill at this moment.

The big picture is that China’s trend growth is expected to slowdown to 7% to 8% over the coming decade, from 10.7% recorded in the previous decade. As the economy shifts its growth engines away from infrastructure, construction and exports toward consumption, especially service consumption, the propensity of demand for commodities is bound to decline. Getting a massage simply does not use as much steel as building an airport. In 2011, it took 71 million tones of steel for one percentage point of GDP growth – that is unheard of in the world’s modern history. We project that the ratio should moderate to 30-40 million tones for every percentage point of GDP growth by 2020. There will be cyclical ups and downs, which may affect China’s demand for commodities and commodity prices, but we think China’s supercycle for commodities is behind us.

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ffart's picture

I guess Credit Suisse is buying gold this month? Organic demand for commodities may be going down but the stockpiling and hoarding will just get worse as trillions of $$ in liquidity continues to be injected into all markets.

Fukushima Sam's picture

Bullish...  Chinamen need iPads.

Dre4dwolf's picture

bearish, china man steal ipad design make own better cheaper stronger faster.

caconhma's picture

This article is POS.

China uses the Stalin's 1930s industrialization model. China will not collapse. To the contrary, China has a lot room to grow.

It still aggressively develops its technology and military mights. Tanks and tank factories require  lots of steel!

Dermasolarapaterraphatrima's picture

Explains why all the CBs are rabidly grabbing as much gold as they can get.

Historically, nations stockpiled gold in preparation for war. (for example, France and Gremany competed for every gold oz and coin leading up to the summer of 1914 when they went to war over some assination in Serbia) ..now it may likely be for an ultimate Uber Currency....but it is one heck of a back-up for war prep still to this day.

Terminus C's picture

All of China's growth is credit fueled to boot.  They are sitting on a credit bublle of epic proportions which means... China is no white knight (or even a read one), however, perhaps they are a black swan.

combatsnoopy's picture

I respectfully disagree with you Terminus C.  China's Growth credit isn't invested in actual growth.  The Chinese have to use a "black market" (any means of funding not through a bank) to start companies because their banks are not really lending to them.

Just like it is here in the U.S.

China is no White Knight, they're more sycophantic than intellegent, pro-growth economists.  Just like Japan.  We've seen how that worked out for Japan during it's decade long recession with a surplus (btw, that's HORRIBLE).  

China has much growth potential, and with their size they can pull off economic stability for themselves and the world.  They're reluctant to do it for status quo reasons.  It's embarrassing, the status quo is embarrassing.  The boomers let the standards down bigtime.  

It's a credit "bubble" because resources are misallocated.     

Gringo Viejo's picture

Respectfully disagree. Commodities have nowhere to go but up when the massive amount of fiat created in the last few year begins chasing them.

mess nonster's picture

All that fiat is imaginary. It was created, and then sequestered (vaporized, rehypothecated, reingested, whatever) by the massive black holes of debt that are bubbling up all over the planet. China is perhaps the biggest debt hole of them all. Asians have always been debt profligates. The credit overhang in China, if we all could realy see it for what it is, would make the Greeks look like Daniel Webster New Hampshire-ites in terms of financial probity.

When the Chinese bubble bursts, look out. 250 million single Chinese men, with no natural outlet for their testosterone (ie women), will be looking around for something to loot, since there will be nothing left of China but a deflationized wasteland.

Hugo Chavez's picture

They will just fuck each other like the arabs do.

Elective homosexuality is common when access to women is resteicted by jail, religion, or female infantacide.

caconhma's picture

<Elective homosexuality is common when access to women is resteicted by jail, religion, or female infantacide.>

Just look at British men who once were the master of oceans.

StychoKiller's picture

Single Chinese womyn might be hard to find, but there's always Cambodians, Indians, Pakistanis, etc.

Kayman's picture

mess nonster

If the CB's got liquidity into the economy, hyperinflation would ensue.

 Because Ben electonically transfers a TBTF $100 billion to pretend gangrene has not set in, does not mean fiat has entered the transaction economy.  There is some leakage, yes, but it mostly is to shore up sand castles on the edge of the ocean.

You, sir, are correct.

astroloungers's picture

Bullish.....inner city street walkers with passports.

Ted Baker's picture


Cojock's picture

What's the problem?

It costs the SNB precisely nothing to create the CHF with which they buy € assets.

And they can print infinitely to defend the peg.

So if the € assets decline in value who gives a shit? They lose nothing.

Easy come, easy go. The joys of fiat currency.

Jason T's picture

time to keen in on productivity gains and increasing consumption at home.. standards of living will be rising in China and continue to fall in the US.  

fourchan's picture

there was a bubble in every material and they will come down save one. gold.

there will be no cutbacks in gold or silver stockpiling. the dollar is toast.

mess nonster's picture

Chrrrrrrrrist! Gold is a freakin' bubble! How do you determine what your gold is worth? By it's valuation in fiat, you gold-bugging idiots!

What are you going to do with your 1-oz gold bars when the deflationary tsunami hits?

C'mon, think- THINK!

You'll go out into the urban wasteland in which you now live, (and you'll go with trepidation, lest someone discover you have a gold nugget.) You'll find the King Rat who sells moldy loaves of bread, or a dented can of Spam, and you'll willingly trade your ONE OZ GOLD BAR FOR A SCRAP OF FOOD.

It's all an exercize in relativity. If in today's terms, a loaf of bread costs 4 bucks, then in one sense, that's all an oz of gold will be worth when you trade it for said bread. But if it's the only loaf of bread to be had, maybe the valuation in the future disaster is very near to infinite. Hey, good for you! Your oz of gold is now valued at 500 gazillion dollars! You're a winner!

(Fer chrissakes....)

graymnzrc's picture

Mad Max Fan? In your scenario, Oil>Gold then, however, it is very difficult to carry around a pint of oil for barter\trade. Eventually a more efficient medium will be used, i.e. gold or silver or copper. Kind of reminds me of the "Old West" without the gunslingers. Don't forget, Mad Max assumed a 'wasteland' environment. In the U.S. there is plenty of fertile farmland.

I would akin China currently to the transition of the U.S. from a dispersed pioneering type environment  at the turn of the century into the industrial revolution (small independant boom towns, farmland, etc). Road building, technological advances, rail roads linking the country around larger semi-planned cities and thus making it smaller. Take a look at that transition and determine how is does or does not apply to China.

WonderDawg's picture

Wrong on many levels. Gold is not magical, nor is silver. They are markets, and they go up and down. They are not immune to liquidation.

donsluck's picture

This trend will be resisted by central banks, they will print more money in an attempt to fight "deflation" this time coming from China. The recent pull backs in PMs are a buy opportunity, especially in Euros. Dollars not so much do to a flight to "safety" out of the Euro.

zilverreiger's picture

What does Jim Rogers think about this?

combatsnoopy's picture

"What does Jim Rogers think about this?"

What do  YOU think of this? 

casey13's picture

There are two side to this supply and demand. Supply of some key commodites is about to decrease because of mine exhaustion and export quotas. All commodities are not the same.

Gringo Viejo's picture

Disclaimer: As always.....Short: Paper Long: Whatever's real.

Bastiat's picture

Oh Goody! The old "service economy" on an international basis -- we'll all just jerk each other off and let the IMF tell us what it's worth.

BLOTTO's picture

What about the 'Golden Age of Gold' for China?


Yardstick of Civilization's picture

So the message on ZeroHedge now is deflation rather than inflation?

WonderDawg's picture

No. The message is: here's some information you won't get from the MSM. Use your fucking head and figure out what it means for you.

Yardstick of Civilization's picture

Seems I'm using my head to draw a conclusion and that you forgot to do the same. When such a simple statement on my parts evokes that kind of reaction from you, it signals to me that you're probably unsure of your own thesis.

It's a lot of fun to read ZH and to draw conclusions about the state of the world from the very good information presented here, but I think that a lot of readers tend to not be analytical enough and just accept all the pieces of information as pointing to the same ultimate conclusion.

This particular article supports the case for deflation, rather than the more promiment messages about inflation that are typically found on ZH. I call 'em like I see 'em . . . you can think it all means the same thing, but in order to do that you're going to have to make sure that you're not using your fucking head.


mess nonster's picture

The message, ever since the days of Chuck Keating and Neal (I'm a congenital moron, like my brothers) Bush, has been how to hide the deflatinary monster, and the problem has been how to feed it while keeping it in its cage. In monster terms, deflation now makes Godzilla look like an emaciated Chihuahua, and the cage bars, constructed as they are, out of quantitative easing and ECB board meetings, seem inadequate to hold the monster back much longer.

if anyone tells you we're headed for hyperinflation, just shake them until their eyes roll back in their heads.

Hugo Chavez's picture

Didnt someone say we had this fancy new technology called a printing press and that deflation cant happen if a central bank is sufficiently determined to avoid it?

Who was that guy again?

vato poco's picture

Have you ever seen the 'looks-boring-but-is-actually-quite-informative' chart of Weimar Republic inflation from 1920-1923? Fascinating reading. IIRC, the Weimar Govt started prinitng marks out of thin air in roughly 1919. This went swimmingly well at first: The mark fell against other currencies, but in Germany, prices rose tolerably. Besides, all the smart pols & bankers assured them that "a weak mark helps exports!". Then things got interesting: In 1919, 1 gold mark was worth roughly 3 paper marks. 1920, roughly 3-to-10. 1921: roughly 10-to-100. 1922: roughly 50-to-1500.

1923 was when all the famous pics of wheelbarrows full of cash being traded for "lunch" were taken. The gold-to-paper ratio went from a mere 10,000 or so marks to more than a billion - in less than 1 year. Und that happened under politicians and central bankers who were *much* smarter and perhaps a little more honest than our current crop of telegenic moron sociopaths.

I'll bet there were sharp operators in Berlin in 1920 scornfully explaining to the nOObs that, "no, we're actually headed for DEflation, dumbkopf". You know: like you just did. Sooner or later, though, the secret always gets out; sooner or later, everyone gets scared - usually all at once. Time will tell, but I know which way I'm betting.

adr's picture

China is going through its version of 1945-60 America at an accelerated pace. The issue is the infrastructure wasn't built to the same quality. Post war America was built on actual need with quality materials and labor, China was built to satisfy investors with shitty drywall and substandard steel.

If China transitions to a consumption based economy, their infrastructure will fall apart faster than anyone can imagine. I really don't know where the world thinks China will get its products from to support a modern US style consumption economy.

Imagine 1960-1980 America on a Chinese scale. Not a pretty sight.

If the goal is to transition China to 1982-present credit based consmer expansion, how does that work? There won't be enough labor available to produce for that, let alone base materials. Africa? really? People actually think that.

Quinvarius's picture

The age of policy stimulus is not over.  If there is no capitalism or trustworthy free markets, you only have ever increasing government printing and spending and the destruction of money.

This gold intervention is a welcome opportunity to dump some government or economic related paper and get some real hard money.  They always are.

mess nonster's picture

Gold- the ultimate fool's paradise.

Here is what you really should invest in:

1. Faith. Put your treasure where thieves cannot break in and steal.

2. Community. Do you have any real friends at all? NO? Then you're a fucking idiot.

3. Family. Well, that should be #2, then community.

4. Arable land with water, 5 acres, minimum.

5. Traditional productive skills. What? You can't hammer a nail, weld two pieces of metal together, yoiu don't know what "righty tighty/lefty loosey" means, you don't even own a freakin' BROOM? You're a helpless, stupid moron, and all the fucking gold in the world will not save your stupid ass.

Hugo Chavez's picture

I can buy all the labor I need.

Hungry people work hard and cheap.

HellFish's picture

Jeeze Mess, so you can turn a wrench.  With your attitude I'll bet all of your "community" has you secretly listed as the first to liquidate for food because you're so annoying.

francis_sawyer's picture

Quiet ~ he's still trying to "loosen" the propane valve by turning it left...

& you'll need SILVER solder to weld your metal (as well $5 to dig it out of the ground on your 5 acres)...

oddjob's picture

 Typical viceral divisive trolling. Your choice between owning Gold and having friends must be an odd situation. Do you buy your friends?


astroloungers's picture

Save for the arable land, what makes you think most do not  have your list covered?

Hugo Chavez's picture

I will take my asian massage with a happy ending please. Maybe cleanup will increase demand for cellulose products.

Just doing my part to keep the boom going.

Bastiat's picture

Yeah and the Central banks will just let all the banks go down in a deflationary implosion because . . . why was that?  They want to hang sooner rather than later?

There will be cyclical ups and downs, which may affect China’s demand for commodities and commodity prices, but we think China’s supercycle for commodities is behind us.

. . . and China is what percent developed?  Both China and India are largely undeveloped--a long, long way from post industrial.  The Chinese government in particular must keep development going or their days are numbered.

Commodity supercycle over?  Watch the prices of food and gas.

LiquidityandLunacy's picture

Nice charts tyler, but youre forgetting that now its Africa's turn to prop up the ponzi. No reason to be bearish unless you believe in fundamentals.

francis_sawyer's picture

now its Africa's turn to prop up the ponzi

That was yesterday's thread... The beta-testing is happening in Ft. Washington, Maryland...

bahaar's picture

 India is still to build it's infrastructure.  So's Africa.  So in the long run commodity prices will have to go up.  As for China (or for that matter India) developing US style consumer economy, I doubt they can.  They don't have the land for land-fill.