Free trade and China’s meteoric rise shaped the first quarter of the 21st century. But the Chinese real estate bubble that burst and destroyed about $18 trillion in household wealth, a wreckage equivalent to roughly $60,000 per family as per Barclays estimates, hit the voracious appetite of Red Dragon that fuelled global growth till recent times.
The Chinese property market is weak, consumer sentiment is ebbing and youth unemployment is high. The jobless rate among China’s 16 to 24-year-olds rose to 18.8%. The country is still sitting on the precipice of deflation.
The perilous state of the Chinese economy is a cause of concern for commodities producers as China consumes more Steel, Aluminium, Zinc, Coal, Copper, Cobalt, Lithium, than the entire European Union and India combined and in some cases more than half of global consumption. Red Dragon is also the world’s second-largest oil consumer that gobbles up 15% of global crude.
The manifestation of the Chinese slowdown is starkly visible in commodities glut that is forcing prices to new lows. In today’s China-dependent world, supply is abundant while demand is flagging pushing prices downward.
Take a look- Cobalt; a key mineral to transition economy saw prices tumbling to eight year lows, Lithium saw 80% price correction from peak while sliding Iron ore prices marked two year low. Inspite of war and skirmishes, crude price is range bound and is trading between $70 and $80 per barrel. Based on OPEC and IEA estimates, Macquarie sees crude supply surplus even in 2025 (see table). Same is the case with Natural gas where prices are depressed for a long time. Reduced demand for Copper forced Goldman Sachs to cut the 2025 price forecast by approx 33% from $15,000 per tonne to $10,100 per tonne as per Reuters.
Commodities usually work on demand and supply gap principle. When demand dips and supply moves up, decline in price is inevitable. The current commodity crisis is amplified with subdued demand from China and abundant supplies from Russia, a mineral economy that is fighting to protect its turf on the global market despite sanctions from western power. Current crisis underscores the blow to global commodities from both demand and supply side.
Sanctions aid glut in commodities
Under the leadership of the USA and European Union, many nations imposed financial sanctions on Russia after its attack on Ukraine. Western Power put a price cap of $60 per barrel on Russian crude.
Price cap and sanctions turned into a blessing for oil starved nations like India. World's most populated country consumes around 4.5 million barrels per day (mbd) and imports 88% of its oil requirement. India ignored west imposed sanctions and imported oil from Russia at a discount to international rate. Similarly, China that imports 65% of its oil requirement also ignored sanctions.
Cumulatively, India and China account for 20% of global crude oil consumption. As per Reuters, Russian crude oil exports stood at 4.76 mbd in 2023 and as per Centre for Research on Energy and Clean Air (CREA), from 5 December 2022 (when price cap came into force), until the end of July 2024, China bought 47% of Russia’s crude exports equivalent to 2.2 mbd while India imported 37% or 1.8 mbd crude.
The combined crude import of 4 mbd by India and China came to approx.4% of global production (102 mbd). As per CREA, Russia’s crude production cost averages $15 per barrel. Large Russian imports by these two nations at a discount to international price is putting pressure on high cost producers like Brazil, Mexico, Venezuela, Nigeria etc. Thus, these nations are producing more oil to meet their nation’s budgetary requirements, making a supply glut at international level.
According to ‘Wheel of Fortune’, a magnificent book by Thane Gustafson, Oil and Gas together represented 20% of Russian Federal tax revenue in 2001 that zoomed to 37% in 2007 (at the peak of the Super Commodity Cycle). As per Oxford Institute for Energy Studies, in 2022, when sanctions were imposed, total Russian budget revenue amounted to $407 billion that included $170 billion from oil and gas or equivalent to 42% of total tax collection, highlighting the growing dependence of Russia on Oil and Gas sector.
The Russian Government is addicted to Oil & Gas revenue. In 1987 Russia produced 11.5 mbd crude, almost 1 mbd more than its 10.6 mbd production in 2023- hinting enough scope for scaling up the production. So when push comes to shove, Russia will not think twice before flooding the global market with cheap oil.
Moreover, Russia is a mineral economy. In 2021 before War erupted, Russia supplied 43% of global Palladium, 14% of Platinum, 11% of Nickel, 6% of Aluminium, and coupled with Ukraine it accounted for over 40% of global Neon production. Russia is the largest natural gas producer, second largest aluminium exporter and third largest coal producer. Russia will leave no stone unturned to protect its revenue from mineral exports. Assurance of cheap supplies from Russia is keeping commodities at a lower level.
Future ahead
Unhindered crude exports from Russia to the world's most populated countries like India and China underscore how the West has struggled to inflict lasting damage on Russia’s economy through price caps and sanctions.
Glut in commodities is hinting at a troubled world. In the 1980s, when the last time commodities plunged for many years in row, communist world came to tatters, two major oil producers Iran and Iraq entered into a long War, China saw a major uprising culminating into a Tiananmen Square massacre and military uprising in Africa and Latin American countries led to widespread violence and genocide.
After unbridled growth of over three decades on account of the dotcom revolution and China’s integration into the global economy, are we moving into a world where growth will be scarce and conflicts will be in abundance? What does China’s slowdown, and the resultant commodities glut hold in store for the world's political-economy future?
Rising conflicts are turning nations inward. It seems each and every nation is preparing itself to secure supplies of critical minerals.
For example, China is making efforts to dominate the green energy revolution by buying mines in Africa. CMOC, the Chinese mining behemoth, became world’s largest Cobalt miner by procuring mines in Democratic Republic of Congo (formerly known as Zaire), a nation that accounts for 70% of global cobalt mine production in 2023. According to Benchmark Mineral Intelligence, CMOC is expected to produce roughly 92,000 metric tonnes of cobalt in 2024, or 38% of global mine supply.
China’s Cobalt chokehold has alerted the USA which is encouraging global mining giants from friendly nations to buy mines in Africa and Latin America. But the rat race for battery metals does not bode well for prices. With supply surging, Cobalt prices are now eight year lows. Lithium prices also tumbled and a steep decline in prices prompted many companies to mothball mines or call off planned investments. The industry has struggled to digest a sharp increase in supply and processing facilities while demand for EVs in some key markets has slowed, reported the Wall Street Journal.
Globalisation is in free fall while sanctions, tariff and price caps are on anvil. The torch bearer for free trade like USA and European Union are imposing sanctions on Chinese imports making a case that the world is not going to come back to WTO led free trade model any time soon.
Less trade means less consumption which in turn hints lesser need for commodities. Moreover, major consumers are securing their need by acquiring mines in mineral rich poor countries like the Chinese purchase of Cobalt mines in Congo. Rising sanctions and tariffs has forced nations to adopt strategies that may not spell well for commodities in near future. Slowdown in the Chinese economy along with the rising ecosystem of sanctions and tariff may prolong sluggishness in commodities.
