Why China Won’t Stimulate Commodity Prices (Yet)
Nov 11th, 2008 | By Irwin Greenstein | Category: Financial NewsAfter China unveiled plans for a $586-billion stimulus package on Sunday, the media was abuzz that it could re-start the flagging commodities market. But it may be premature to peg all your hope on a single massive infrastructure build-out.
After all, the commodities boom fed off global prosperity. India, Russia, Southeast Asia were all rolling in dough during peak commodity prices.
It was the overall scope of commodity consumption that gave rise to the term “Commodity Supercycle.” And that consumption was fed in large part by liberal credit.
The problem, however, is that there’s simply no more credit to feed the beast – despite trillions in government bailouts.
As a result, it could still be too early to get back into commodities with the expectations that prices will rise again any time soon.
While China’s $586-billion massive infrastructure build-out will certainly consume plenty of steel, cement and oil, the country remains in a deflationary cycle.
China is literally attempting to dig its way out of this deflationary cycle with new construction projects. Other statistics coming out of China argue that the $586 billion package may not be enough on its own – and that China is more reliant on the global economy than construction projects for true economic growth.
Housing prices continue to decline, manufacturing is shrinking and the trade surplus is on the rise.
Building new roads, railways and airports won’t really affect the trade surplus, raise manufacturing output and make the cost of living much cheaper than it is today.
So if you believe that China’s stimulus plan could drive up commodities worldwide you may be in for a rude awakening.
Commodity prices will only go back up after governments find a way to inject new cash into their respective economies.
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