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The recent focus on China as an exporter of rare earth metals highlights an extremely important fact which is often missed, lost or forgotten: China is the world's largest commodity producer.
This year, China's production of natural resources will likely exceed $700bn at international prices, surpassing the US and Russia by 10% and 25% respectively. And this does not even include midstream or upstream activities, such as oil refining, steel or aluminium smelting, where it is a large exporter with upwards of 50% of global capacity.
Further, not only does China now produce more oil than Iran but also, this year, according to the International Energy Agency, it will add 210,000 barrels a day to world oil supplies, more than any other country in the world.
This position of China as a commodity producer, as opposed to commodity consumer, is beginning to have equally important implications on commodity pricing, as China shifts from a low-cost provider of commodities to a high-cost marginal supplier. One of the key reasons China is the world's leading producer of rare earth metals (a title it took from the US in the early 1990s), with an ultimate market share of 95% "“ even though it has only 37% of the world's reserves "“ is that it is a lower-cost provider.
This was a pattern repeated in many commodity markets over the past several decades, including zinc, lead and tin, due to optimal geography, cheap energy from coal and low-cost labour. Even if most of the incremental supply went towards meeting domestic consumption, global commodity markets became dependent upon Chinese commodity supply, either directly through exports, or indirectly through reduced imports.
Even in gold, where China is also now the world's largest producer, its growth in central bank gold holdings was achieved by simply mining its own reserves in a low-cost manner as opposed to buying on the higher-cost international market.
This emphasis on domestic supply growth is not by chance, as China has a long history of policy directed at being self-sufficient in natural resources which dates back to the Ming Dynasty (1368-1644), with an obvious emphasis on self-sufficiency in agriculture. As a result, the list of commodities in which China is significantly in deficit is surprisingly small: crude oil, copper, soybeans, iron ore and platinum group metals.
However, China's status as a low-cost producer and self-sufficient is now being challenged by economics and domestic policy. In addition to facing rising energy and labour costs, China has also recently enacted more strict enforcement of energy efficiency measures that are particularly targeted towards commodity-producing industries since they generate pollution, are energy intensive and create little employment.
This emphasis on efficient energy usage is not only raising the cost of production, but it will also be likely to cause some of the capacity to become obsolete relative to low-cost producers elsewhere in the world, much like what happened in the US during the 1970s.
The US is no longer the largest producer and exporter of commodities not because it ran out of supply but rather because the environmental costs made the US a high-cost producer. This ultimately made imports and efficient consumption the more attractive option.
A similar dynamic is clearly already under way in China. Not only is China beginning to enact tough and leading-edge consumption measures, but it is also likely to become increasingly more dependent upon the global markets for commodity supply as domestic output costs rise, making imports more attractive.
As China's status as a low-cost commodity producer wanes, ironically much in the same way the US rare earth metals industry did in the 1980s due to China, we should not only focus on China as a consumer of commodities but also on China as the world's largest supplier of commodities.
-- Jeffrey Currie, global head of commodities research at Goldman Sachs
China
Commodities and natural resources
Economics
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