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China And Commodities Prices: The Slow-Motion Train-Wreck

Business, China, Company Strategy, Economics, Oil & Gas

By John Richardson

OIL prices are now in bear-market territory with commodities prices in general at a 13-year low, according to the latest Bloomberg Commodities index which follows 22 different commodities.

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Not surprisingly, therefore, the share prices of mining and other commodity-producing companies have fallen to their lowest levels since the depths of the 2008 Global Financial Crisis.

This is largely to do with China, as most commentators are belatedly waking up to the fact that all that glitters is not gold – i.e. you cannot believe China’s official GDP numbers.

Growth in lending, electricity consumption and freight traffic are as a result some of the statistics that are being much more closely monitored, as should have been the case years ago, in an attempt to get a real gauge on growth in China.

The latest data on these three key measures tell us the following:

•Rail freight traffic was down 11% in January– May versus 2014.

•Total lending was down 15% in H1 versus 2014, with shadow lending down 50%.

•And electricity consumption, was up just 1.2% in H1. This represented the lowest growth in electricity consumption in 19 years as nine provinces saw negative growth. These are no doubt provinces heavily dependent on manufacturing industries that are severely oversupplied, and so are being restructured.

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You are thus increasingly seeing estimates of real GDP growth in China, as opposed to the fictitious official numbers, in the low single digits.

And because China is, of course, the biggest global driver of demand for commodities, you have part of your explanation for lower commodities prices.

This has been a slow-motion train-wreck as it has taken several wasted years for people to wake up to what’s happening with China’s economy.

The flipside of the same coin is that vast oversupply in commodities, including in oil and iron ore, have been built to serve wrong estimations of Chinese growth.

Another reason for oversupply in oil and gas are the wholly misguided policies of the US fed. These policies are now set to be unwound through an imminent increase in US interest rates. The dollar is thus strengthening, which is exerting further downward pressure on commodities prices.

Add all of this together and this explains why the Bloomberg index was this week at a 13-year low.

This all points to what I have been warning about since last year: That we are heading into an extended period of deeply entrenched global deflation.