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China: A Catalyst to the Global Commodity Market

The twenty-first century has seen China emerge as a dominant exporter and importer, and although this big fish is still a developing economy, it has occupied quite a bit of space in the global pond.

According to research from the Federal Reserve Bank of St. Louis, China only accounted for 2% of all commodities traded in 1990, but by 2013, the country was the leading commodity importer, making up 15% of all global commodity trade. As the report notes, some of this is due to the global shift in manufacturing, which resulted in countries like the U.S. becoming more independent.

Regardless, China’s unprecedented 10% average gross domestic product (GDP) growth rate between 1990 and 2013 was another key factor, as it was accompanied by a newfound need for resources (also read: Here’s How Trade Drives China’s Economy).The growth directly benefited China’s suppliers, which are the major commodity exporters of the world: Argentina, Brazil, Canada, Chile, Colombia, Indonesia, Mexico, Russia, South Africa, and Venezuela.

China is currently targeting a GDP growth rate of 6.5% as part of its Thirteenth Five-Year Plan; this represents a slowdown from the 10% average rate of previous years (also read: How China’s Five-Year Plans Reflect Its Government Structure). A growth rate that high is clearly not sustainable, and the slowdown could be interpreted as the steady stabilization of the world’s second largest economy. With slowed growth also comes a decreased appetite for resources, something now visible in the global commodity market.

Brazil

Beginning in 2002, Brazilian exports increased dramatically, to the extent that within six years, its trade surplus increased from $2 billion to $40 billion. The standout exports from the region are soybeans and iron ore. China accounted for 18% of the nation’s exports, meaning that its newly decreased demand has certainly helped diminish Brazil’s economic growth rate; Brics magazine notes that China’s domestic soybean consumption increased 116% between 2000 and 2008.

According to data from the United Nations (UN) Comtrade (commodity trade) database, Brazil exported $44 billion worth of goods to China in 2015. Although this is dramatically higher than its exports at the turn of the century, it represents a decrease from the $51.7 billion exported in 2014 and $54.3 billion exported in 2013. This, coupled with Brazil’s corruption challenges, has damaged investor confidence in the region.

Broader South America

Of course, Brazil is not the only South American country that exports to China. Argentina, Chile, Peru, and Venezuela export tens of billions of dollars’ worth of oil, copper, ores, slag, ash, mineral fuels, and distillation products to China. Exports make up a sizable chunk of each of these nations’ respective GDP.

The downward pressure on Latin American currencies due to China’s diminishing demand has made imports more expensive, and is devastating to the region. Venezuela’s currency inflation, for example, is estimated to be nearly 700% a year, making it the highest in the world. Until these countries can fund a new source of economic growth, it appears that things will only continue to get worse.

South Africa

China is South Africa’s largest trading partner, and the two countries exchange around $20 billion in goods a year. But as fears about the continued impact of China’s economic slowdown escalated, South Africa’s currency, the rand, plunged to record lows early last year.

Exports account for about 31% of South Africa’s GDP, and 9.6% of exports went to China. According to UN data, South Africa exported $30 billion worth of goods to China in 2015, a notable decrease from the $44.5 billion of 2014. As a result, value of the rand decreased by about 25% between July 2015 and January 2016. This significant devaluation in currency has also made imports more expensive for South Africa, adding to the nation’s growing list of woes.

African Region

Small African countries such as South Sudan, Sierra Leone, and Mauritania have been hurt too, but the ones seeing the most dramatic effects are Nigeria, Angola, and Zambia. According to Geopolitical Futures, Zambia produces a large amount of metals, with copper in particular making up 75% of total exports; 41% of Zambia’s GDP comes from exports, which goes to show just how leveraged it is in foreign interests like China.

Back in 2014, China consumed a quarter of Zambia’s total copper, but in the first quarter of 2015 alone, exports dropped by 25%. Nigeria and Angola are large oil producers that have been crippled by lower oil prices, as well as decreased trade; both countries make over 90% of export profits from oil sales.

Other Major Oil Players

In 2011, China imported $40.3 billion and $49.5 billion from Russia and Saudi Arabia, respectively, but by 2015, those numbers were reduced to $33.2 billion and $30.2 billion. OEC data shows that oil, both crude and refined, makes up 55% of Russia’s and 82.5% of Saudi Arabia’s total exports.

The Moscow Times reported that Russian exports to China fell by 19.1% in 2014 alone, while Saudi Arabia’s oil imports account for 13% of China’s total in 2015, down from the 15% share it had in 2003. Granted, oil difficulties are also caused by the increase of production in countries like Iran and Iraq, but China is dishing out a share of the pain as well.

Australia

OEC data shows that China has been Australia’s biggest export destination, comprising 34% of the nation’s overall export volume, or $82.9 billion of its overall $244 billion worth of exports. According to the 2014 Australia-China trade report, China has contributed the most to Australia’s GDP since 2009, having surpassed both Japan and the U.S. This contribution made up more than 5.5% of the nation’s GDP starting in 2011.

UN data shows that Australia provided China with nearly $74 billion worth of resources in 2015, the majority of which was various ores generated from the nation’s huge mining industry. Although the number may seem healthy, investors should note that Australia exported nearly $98 billion worth of goods to China just the year before.

Greater Asia

China also imports precious metals, gems, oil, and gas from countries in Eastern/Southeastern Asia. India, Thailand, Malaysia, Indonesia, and the Philippines account for a sizable chunk of commodities trade with China. Imports from these countries have decreased by a combined $31.1 billion from 2011 to 2015, although proportionally, India and Indonesia have seen the largest decrease.

The U.S. Energy Information Administration reported that nearly 47% of growth in global coal trade was driven particularly by import demands from China and India. China’s growing lack of demand is reversing the gains this has provided other countries, particularly Australia and Indonesia, who are the largest contributors to coal trade.

Developed East Asian economies like Japan and South Korea are also hurting due to decreased export activity to China. The proportion of the two countries’ exports to China is 20% and 25%, respectively. In 2015, Japan exported $143 billion worth of goods to China. This was mainly comprised of electrical items, machinery, cars, and plastics.

Still, this is a huge decrease from the $194.5 billion that it exported in 2011. South Korea performed a comparatively stronger $174.6 billion in exports in 2015, yet still less than the $190 billion of 2014 and $184 billion the year before. Although neither of these countries are major commodity exporters, this shows that even developed industrial powers are hurt by China’s current economic trend.

Future of the Commodity Market

As you can see, China has really left a mark on the world. The same way it helped many nations undergo rapid economic growth, it now leaves some in a difficult position. Granted, it isn’t China’s responsibility to sustain these economies, but it does reflect just how large an impact global interaction can have on, well, everyone. In order to see a change in the market moving forward, a new catalyst is needed, although there’s no way of knowing when a where that will come from.

For a look at more investment opportunities in China, check out this special edition of the Zacks Friday Finish Line, where hosts Ryan McQueeney and Maddy Johnson are joined by Brendan Ahern, the Chief Investment Officer of KraneShares. KraneShares is a leading provider of China-focused ETFs and Chinese investment education.

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