China’s appetite for commodities a boon for businesses

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While much of the world is still struggling to recover from the great slump of the past few years, nations and states that cater to China’s enormous appetite for energy, food, metals and other commodities have been doing swimmingly.

Take Iowa, for example, where Chinese Vice President Xi Jinping, the country’s presumed next leader, made a visit on Feb. 15. The good feelings undoubtedly were mutual as the farm state is a major pork producer, and China consumes nearly half the world’s pork. Moreover, Iowa is the world’s largest producer of soybeans and China accounts for nearly a quarter of the world’s demand in that market as well.

“U.S. products have a wonderful image in China,” said William Westman, a vice president at the Meat Institute, enthusing over China’s importance to U.S. farmers and ranchers. “China is our largest market for ag exports in all commodities, and our trade with the country is up more than 1,000 percent since 2002.”

Farm states aren’t the only beneficiaries of China’s hyper-charged growth in recent years. States such as Montana, Utah, Washington and Idaho have benefited from China’s robust demand for coal, lumber and metals to feed its busy factories and supply its enormous construction projects.

And oil-producing states like Texas and Alaska have profited from China’s fast-growing demand for fuel, which buoyed world oil prices even during the recession.

In fact, a wide swath of the world economy has been thriving in the wake of China’s emergence as an economic superpower with big appetites in the last decade.

Studies by the World Bank and others show that, with the world’s largest population of 1.3 billion, China now consumes more than half the world’s cement, and nearly half the world’s iron ore, coal, steel and lead.

That has lifted the prospects for entire national economies from Australia and New Zealand to Brazil and Russia, which depend significantly on the production of commodities, creating a teeming subset of healthy state economies within the larger, ailing global picture.

“Commodities demand has been driven over the last decade by the growth in China, there is no doubt about that,” said Evy Hambro, a commodities investment expert at the BlackRock hedge fund. Global markets for everything from copper and gold to oil and corn closely follow developments in China’s economy and react, sometime violently, to any hint that Chinese demand could subside.

Other major emerging nations, such as India and Brazil, also are rapidly increasing their wealth and consumption of raw materials and are driving up prices too, but “aren’t quite the scale of China” as yet, Mr. Hambro said.

Pressure on prices

China’s perpetual-consumption machine does have a downside for consumers in nations that compete for the world’s resources. It has made life particularly uncomfortable for American consumers, who would like to see gasoline prices stay well south of $4 a gallon, where they threaten to surge for a third straight year.

Moreover, as growth picks up in the U.S. and elsewhere, that puts further pressure on prices for vital commodities like wheat, rice and oil, and could eventually lead to a spiral in world food and fuel prices like the one that resulted in shortages and food riots around the globe in 2008.

Peter Csoregh, senior portfolio manager of Robeco’s Natural Resource equities fund, said that tensions could erupt at some point as China vies with the West for natural resources to support its growth.

“Can they double [consumption] from here? Can they triple from here?” he asked at a recent Reuters conference. “Sure they can. Is there enough oil or copper in the world to allow them to do that? No.”

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