- The Washington Times - Sunday, February 26, 2012

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.”

But for now, China’s strength remains a positive for the world economy, buttressing islands of growth and prosperity among the more general gloom.

Australia and New Zealand, which hitched their economic wagons to China when its booming consumption trends emerged in the middle of the last decade, barely felt the effects of the global recession as a result.

New Zealand, which has sold China lamb, grains and all manner of other foods, has been positively booming. And catering to China’s demand for coal, beef and grain, Australia’s economy is so solid that it has become a favored destination for investors worldwide looking for growth and a safe haven from the debt crises in Europe and the United States.

America’s northern neighbor, Canada, whose economic fortunes in the past were closely tied to the U.S. economy, weathered the Great Recession with ease, thanks to China’s booming demand for grains, lumber and other raw materials Canada produces in large quantities.

Commodity producers in Latin America and Africa, from Argentina and Venezuela to Gabon and Botswana, also have been lifted by Beijing’s roaring demand while profiting from China’s strategy of investing in commodity production ventures around the globe.

Investors take note

China’s role as the locomotive of growth for a long list of countries and states represents perhaps the strongest proof to investors and economists that it has arrived as an economic superpower and will increase its mark on the global economy in the future.

A whole cottage industry of investors is piggybacking onto China’s growth to try to make a profit. BlackRock and other major hedge funds and investment funds have bet billions of dollars that China will continue to drive up prices and demand for commodities for years to come.

Investors have piled into futures markets for oil, corn, soybeans and pork. They are pouring money into the currencies of commodity-producing nations like Australia and Canada, making them among the strongest in the world. Other investors have jumped on the bandwagon, as they expect perpetually rising commodity prices to be a good hedge against inflation.

Investors have been scouring the world over for prime agricultural land to buy in an effort to milk what they see as a long-term trend toward higher food and commodity prices.

China’s own government and corporations have also been scouting out investments in agricultural land and commodity corporations in an effort to profit from the boom while hedging against higher prices and shoring up the Asian giant’s food security.

The investment boom has driven up prices for farmland from Ethiopia to Iowa, and touched off a heated debate in Australia, New Zealand and other countries where Chinese efforts to invest in farmland and domestic industries are not always welcome.

To some, the commodities investment boom is just beginning. Danny Esposito, co-editor of the Penny Stock Detectives newsletter, said commodity investments should be an essential part of every portfolio, given the expanding middle class in China and India and their growing appetite for scarce world resources.

“With that advancement naturally comes a change in eating habits and in the foods desired,” he said, driving up demand not only for meat, but for animal feed grains, such as corn and soybeans. “Where at one time meat was considered an expensive luxury, it is now an affordable part of their daily diet.”

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