NEW YORK: Until recently, China was a beast whose appetite knew almost no limit. It feasted on the world’s raw materials, buying them in a voracious, globe-spanning spree. Indonesian coal powered villages that morphed into mega-cities. Peruvian copper lined power cables for nearly 100 new mass-transit rail lines. Brazilian and Australian iron ore was turned into steel for skyscrapers rising in Shanghai at a rate of one per week.

So profound was that growth that even the hint of a slowdown is causing convulsions in the many countries that fed China’s rise.

The deceleration in Chinese investment and construction, though gradual, has come with a dramatic side effect: a vast lowering in the value of the raw materials that are mined or drilled from the earth. By one major measure, commodity prices across the globe are at their lowest point in a century. And the downturn — felt from financial capitals to Zambian mining towns — is likely to be far more lasting and consequential than the turbulence China triggered in the world’s financial markets last week.

The dive in the commodities market reflects the first time since China emerged as a production beast that the nation is pulling down, rather than buoying, the global economy. After a two-decade farm-to-city migration on a scale never seen before, a series of markers show that Chinese growth has lost steam. Its economy this year is forecast to expand 7 per cent, off from sustained double-digit highs, and many analysts suspect real growth is lower than the Communist Party’s numbers suggest. Last year, coal consumption declined for the first time in 14 years. Companies are now trimming long-term demand projections.

“This period of incredible construction is flattening out,” said Yukon Hwang, a specialist in Chinese economic development at the Carnegie Endowment for International Peace. “Demand won’t ever be as robust as it was during this super-cycle.”

The sheer scale of China’s economy is so big that the nation still dominates the commodities market, consuming more than two-thirds of global iron ore, about half of its copper and nickel, one-eighth of its oil. But prices for those materials and energy sources have tanked amid the realization that China was building too fast — constructing little-used highways and entire suburbs of empty apartments — while many commodities producers were still scaling up.

The world is left with a commodities glut: As China’s appetite wanes, the rest of the developing world isn’t growing fast enough to pick up the slack. In theory, a drop in commodities prices should provide a boost for developed, consumer-led countries — something that is already taking shape in the United States, where spending for everything from cars to homes is on the rise.

But in resource-rich countries, the pain of China’s slowdown is acute. Latin American nations are facing an end to years of easy commodities-led growth, helped by Chinese investment. Petro-states, such as Russia and Venezuela, are in crisis. The World Bank says sub-Saharan Africa, facing head winds from China’s situation, will grow less rapidly this year than projected — a step backward after a booming decade in one of the world’s poorest regions.

Many commodities experts say prices could remain low for several years and lead to massive cutbacks in jobs and investment. Rio de Janeiro-based Vale, the world’s largest producer of iron ore, has been racing to shutter mines and cut costs. The company, in tandem with a Japanese co-owner, recently sold the Isaac Plains coal mine, in Australia, only three years after the site was valued at more than $600 million.

Above all, China’s rise was built by steel. And the experience of the past 20 years shows how Chinese demand could upend a sleepy commodity market on the way up while causing a price collapse and riling trade partners on the way back down.

On the way up? The Chinese steel industry transformed from one of the world’s largest (in 1995) to the largest eight times over. Chinese state-owned companies went on a massive overseas quest for iron ore, forcing the establishment of a daily market price. (Until the mid-2000s, the Japanese set annual prices in backroom negotiations with suppliers.)

The value of iron ore spiked, sending mining companies on a hunt to expand — sometimes even into conflict zones. When the global recession hit, a Chinese government stimulus was filtered almost directly into the steel industry; producers didn’t flinch. In early 2011, the price for iron ore hit $180 per dry metric tonne, up six-fold from 2005.

“Once-in-a-generation prices,” Jimmy Wilson, the president for iron ore at the Australian mining giant BHP Billiton, said in a presentation on the company’s Web site.

Economists say China always intended to “build ahead” — that is, to construct urban centers with the expectation that they would fill up with a fast-growing urban middle class.

By arrangement with Washington Post-Bloomberg News Service

Published in Dawn, August 30th, 2015

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