China has long been the world’s biggest commodities buyer—and the country’s appetite has only increased despite a protracted property slump and lackluster economic recovery. The reason: geopolitics.
The
iShare S&P GSCI Commodity-Indexed Trust
(GSG) is up 15%. Escalating U.S.-China tensions and fallout from Russia’s war in Ukraine has supercharged China’s commodities appetite, taking its import levels to a record high.
While China’s economy is shifting to a period of slower growth that’s less reliant on the big-bang construction projects of the past, the country’s focus on becoming more self-reliant for critical resources amid a less hospitable global backdrop is likely to keep its demand for commodities strong, according to a recent client note from Natasha Kaneva, head of global commodities for
China accounts for 40% of global commodities demand, almost double what it consumed in 2006, according to JP Morgan analysts. Despite its sputtering economy, China’s imports of iron ore, agriculture, metals rose 16% in 2023, and they rose another 6% in the first five months of this year as China tries to address one of its biggest weaknesses.
Beyond abundant supplies of coal and rare earth—which the U.S. and others need—China is resource-poor, according to Kaneva and team. Though China accounts for a fifth of the world’s population, it has limited fresh water resources and just 7% of the world’s arable land. Though China is a leading producer of wheat and corn, its food self-sufficiency ratio fell from 94% in 2000 to 66% in 2020 and will likely be down to 59% by 2030—a problem for a country whose history has been marred by famine.
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China is the world’s largest steel maker, the dominant electric vehicle maker and the world’s second most populous country. Yet, China relies on others for 70% or more of its crude oil feedstock and 40% of natural gas. Almost 80% of the raw inputs needed for China’s copper demand also comes from abroad, and it buys three-quarters of all seaborne iron ore needed for steelmaking. Also problematic, notes JP Morgan analysts, is that most of China’s needed commodities come to it through eight marine choke points, including the Strait of Malacca, where the U.S. has significant influence.
The sanctions levied against Russia after it invaded Ukraine and the export restrictions the U.S. and other allies have implemented to limit China’s access to critical technologies have served as a wake-up call. Much as it has forced companies to reassess supply chains, it has pushed China to double-down on efforts to reduce its reliance on others.
China is trying to boost the efficiency of its mines and farm, even as it tries to gain control of resources overseas through equity stakes and partnerships and building strategic stockpiles—steps it took through its Belt & Road infrastructure strategy and which continue, Kaneva says.
China is also trying to diversify its food and energy suppliers, building storage capacity for increased reserves and trying to get more of the commodities overland rather than via sea where the U.S. has more influence. This will help protect China if geopolitical tensions spill into the military realm over the South China Seas or Taiwan, for example.
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China is trying to boost farm output through genetically modified crops and seeds, hefty investment in land in Cambodia, Laos, Myanmar and sub-Saharan Africa as well as acquisitions, like that of seed and crop chemical giant Syngenta in 2017. It is also building pipelines for energy with Russia and Central Asia to create new trade routes.
China’s economy may be transitioning to a slower path for economic growth but its demand for commodities, at least for now, isn’t slowing—and that could provide a buffer for at least some commodities prices.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
