x Abu Dhabi, UAETuesday 25 July 2017

Coal mounds that symbolise the end of the golden years

Qinhuangdao is China's largest coal shipping port. Huge mounds of coal are now clearly visible on satellite images. Are gluts from coal to copper to cotton a harbinger of the end of the "commodities super-cycle"?

Workers unload coal at a storage site in China's Anhui province. 
Jianan Yu / Reuters
Workers unload coal at a storage site in China's Anhui province. Jianan Yu / Reuters

Qinhuangdao, a city on the Yellow Sea, is China's largest coal shipping port. Huge mounds of coal are now clearly visible on satellite images.

Are gluts from coal to copper to cotton a harbinger of the end of the "commodities super-cycle"?

The super-cycle theory became popular around the middle of the past decade, as economic growth and urbanisation in Asia drove the prices of metals, food and energy to record levels.

In turn, this helped to fuel booms in the Middle East, Russia, Australia, Brazil and Canada. Today, stockpiles of key materials and other indicators, such as lower electricity consumption and idle shipyards, suggest a slowdown in Chinese growth.

Zhang Hongxia, the chief of the largest cotton textile maker in China, observed last week, "The Chinese economy is only at the beginning of a harsh winter. Everything from coal to steel inventories are piling up".

Meanwhile, Australia's resources minister, Martin Ferguson, says "the resources boom is over". His country is a major supplier of coal, iron, copper, uranium and gas to China.

And the head of investor relations at Vale, the world's leading iron ore producer, says: "We are not going to see the spectacular growth rates. The golden years are gone."

The iron-ore price dropped below US$100 per tonne for the first time since December 2009.

In the short term, China is suffering from a tepid recovery in the United States, and the continuing crisis in Europe, two of its main export markets.

Close trading partners South Korea and Taiwan would be heavily affected by a fall in Chinese growth.

India and Brazil are also struggling with slowing economies, as are smaller Asian tigers such as Vietnam. Without radical reform, currently mired in messy domestic politics, the Indian miracle seems to be over, for now at least.

In the longer term, China faces the difficult transition from an export-driven economy to relying more on domestic demand. Its working-age population will begin shrinking by 2018, a function of its "one-child" policy, and wages are rising 15 to 20 per cent per year.

For all the talk about "Chindia", the boom, at least in oil, was largely a Chinese phenomenon. China made up 45 per cent of new global oil demand this century; the Middle East, whose consumption was driven by high prices for its main export, an additional 26 per cent. India represented a further 10 per cent, while demand in developed economies has been falling steadily since 2005.

As it did during the global economic crisis, China could launch another massive stimulus package.

However, this is unlikely to come before the new leadership is installed before the 18th party congress in October.

The oil-exporting countries thus have to contend with a much less favourable external environment than they enjoyed in the first decade of this century. In retrospect, they allowed oil prices to go too high in mid-2008, and again this year, by investing insufficiently in new production capacity.

If the world economy and oil demand does slow, the GCC countries have sufficient financial resources to cut production to defend prices.

Sanctions on Iran also continue to buoy oil markets. But that does not address the longer-term problem, that a slower world economy and more measured Asian growth may not sustain the record oil prices on which they have planned their budgets.

If it is any comfort, should oil prices drop sharply, Iran, Russia and Venezuela will run into severe economic trouble before the GCC does.

Those countries should hope that those terrifying, teetering mounds of copper ingots in Chinese warehouses and car parks are not a metaphor for a commodities boom about to come to a crashing end.

Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis and Capturing Carbon

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