You can’t really talk about economic expansion today without muttering a sentence or two about a commodities supercycle. To a large extent, growth in the BRIC countries - Brazil, Russia, India and China - are fuelling this supercycle by gobbling up ever-greater shares of the world’s available resources.
Let's put that in perspective. If you sift through history and study its cycles, you will find a telescoping of linear time. Each era is becoming shorter than the last. The agricultural revolution lasted 7,000 years. The scientific revolution took 400. The industrial revolution took a mere 150 years. Wiring our planet with copper cables to transmit and receive messages took the century that ended in the 1980s, while rewiring it with optical cable took only a couple of decades. The speed of global messaging went from years in Magellan’s time to immediacy by email. The telescoping of time cycles appears to be the norm rather than a perfect set of coincidences.
Perhaps this commodity supercycle will be the shortest cycle of them all. Perhaps peak oil will bring on its collapse.
Enter the Dragon
Here in China, there is a palpable frenzy about the birth of a new commodities supercycle driven by the BRIC countries as they industrialise and modernise. That takes a lot of material and newly created money. In the last 130 years, there have been three commodity supercycles - periods of intense demand and rapid price escalation. The first lasted from the 1880s to the 1920s (45 years) and was followed by the Great Depression. The era of post-war reconstruction lasted from 1945-75 (30 years) and sank into the dismal morass of stagflation.
The new supercycle began barely five years ago. Will it be shorter than the last? How will it end?
China’s economy is at least 50 per cent manufacturing driven. New foreign direct investment, joint ventures and factory construction is the main force behind expanding internal demand for commodities. It’s the factory owner who is purchasing the new apartment, the factory manager who is buying the latest-model car, the factory employees that go to stores and buy drinks in plastic bottles from hyper-marts or corner stores.
As the world shifts its plants to China and buys Chinese goods, it puts newly created money into the society. This allows the average family to buy once unobtainable products. Stores, real estate and stock markets are booming as new money created in the last five to ten years trickles down. And that money relies on manufacturing and export.
Think of all of the industries and enterprises involved just to keep the supply chain of raw materials and energy flowing to factories so they can continue to manufacture the world’s goods. Everyone involved with logistics and freight forwarding, construction, computer networking, materials importers, middle men, trickling all the way down to the uniform-producer for the factory workers themselves and the snack truck at the front gate. They are all involved and now heavily dependent on low energy prices to be able to sell goods and services to foreign markets. As the cycle continues, it generates wealth that drives internal consumption that keeps the cycle going. In the worldwide commodities supercycle, China is behind the wheel.
If the buying outside China stops, so will its internal consumption. The supercycle buster will be a reduction in manufacturing orders from other countries also affected by constricting economies in recession or depression due to soaring prices for fuels and other commodities. China is highly vulnerable to and dependent on a system that relies on the consumption of manufactures by customers outside its borders.
First published at the Energy Bulletin on November 10, 2007.
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