Chinese demand for commodities has been buoyant over the last 2 decades or so. In fact, it is believed that the current commodity price boom is a result of Chinese demand. But what exactly drives the demand for commodities? Once we get to know the demand drivers we can link it to the Chinese demographics and try to understand why the demand potential is so high from this dragon nation.
Basically, there are 3-4 factors that essentially drive commodity demand. First is increasing urbanisation. Second is rising population and third is decreasing poverty. It is common sense that rapid urbanisation leads to increasing commodity demand. And we all are aware about the rapid urbanisation that took place in China in the past. In the last two decades, China also witnessed huge population expansion which drove the demand for agricultural commodities. Poverty rates have also been on a decline (drives agricultural commodities and promotes urbanisation). All these factors created a perfect scenario for a commodity bull run driven by China.
But will this run continue in the future as well? In other words, will the Chinese demand remain intact?
In order to answer this question let’s once again re-visit those very factors that drove commodity demand for China. Then we can analyse how China’s demographics have changed now for the commodity demand to witness any shift. For one, it may be noted that most of the urbanisation has already taken place in China. Further, population has also been brought under control. Also, with poverty rates eradicating at a fairly decent pace in the recent past the scope of further eradication seems limited. This will have a direct impact on prices of agricultural commodities.
Thus, it appears that the China factor will longer be enough for the commodity bull run to continue from here on. May be, other countries like India, will have to witness a paradigm shift with respect to the internal architecture on policy making. This can lead to rapid urbanisation and eradication of poverty. Only then can the commodity prices regain their north bound journey.