What China’s ‘new normal’ means for commodities

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HONG KONG (MarketWatch) — China’s “new normal” economy might suggest merely impressive growth, rather than the magical growth of recent decades. But for natural commodities and large swathes of the world economy, things may never be the same again.

In a new report, Citi argues that global economic growth is now undergoing a fundamental transition, with a shift away from the prevailing model of China as the world’s factory. In the previous decade, China hollowed out industry from just about every corner of the globe as it became the dominant manufacturer of everything from Apple AAPL, +0.70% iPhones to sneakers and furniture. At the same time, it also became the primary driver of global commodity demand, supporting a multiyear commodity super cycle.

But now, as commodities across the board continue to make fresh multiyear lows, it is clear this boom is over. Analysts are now grappling with the wider implications as the price declines stretch from weeks to months, forecasting an upheaval in industry structures, trade flows and commodity markets.

China’s weakening commodity demand looks to be structural and permanent. While recent strength in the U.S. dollar DXY, +0.29% may have contributed to global commodity weakness, the slowdown in China is the dominant factor. This is not just a cyclical pause but an act of considered government policy to finally rebalance the Chinese economy, which even eight years ago then-premier Wen Jiabao described as “unstable, unbalanced, uncoordinated and unsustainable.”

Beijing now effectively has no other option but to steer a new course due to environmental damage, industrial overcapacity and dangerously high corporate debt levels caused by the excessive investment that went before. And there can be little doubt this will mean lower growth. .........................(more)

http://www.marketwatch.com/story/what-chinas-new-normal-means-for-commodities-2015-03-22