The difficulties of interpreting and forecasting the current dynamic economic environment are revealed in the latest World Bank report on commodities. You can download the report at the World Bank site or directly from us here Commodities at the Crossroads, 2009. It’s long-winded holiday reading, but if you follow steel (or commodities generally) it’s worth the effort.
The report is worth the effort not because it’s right – it’s often not – but because it has lots of data (much of it contradictory) and many assertions about commodities and their future. This is to be expected. This is the worst time of all to be trying to forecast what’s going to happen in the global economy, but that’s what the World Bank is supposed to do. The obvious difficulty the authors had in being true to both an underlying macroeconomic view and the recent apparent shift in commodity demand trajectory seems to expose their own uncertainty about which is more true to what is actually going on.
Unlike the bank, we’re not yet ready to abandon an optimistic commodity scenario. Tony will deal elsewhere with the issues the bank’s GDP forecasts raise for 2009 steel consumption, but I want to concentrate on what seems to be a significant shift in what the authors are saying about likely commodity consumption. On page 70 of the report:
Except for a few export- and manufacturing-intensive Asian economies, other developing countries, including those at much higher levels of income than China, have not seen metal intensities rise this way. Metal intensities in Brazil, India and South Africa… remained flat or continued to decline during the same period [from the early 1990's to about 2006]
The report seems to suggest that metal intensities in China are somehow unusual (especially if you throw out all similar examples!) or driven by other than market forces as in the Former Soviet Union (p.52). It remains to be seen if China’s steel use is unnatural. On a per capita basis, China uses about 307kg of steel (worldsteel, 2007) compared to the US at 354kg, Europe 392kg, South Africa 123kg, Brazil 115kg and India 43kg. But all those economies are at very different stages of development, have very different roles in the World economic network, have very different economic parts and very different geographies. All make a difference to steel intensity.
Intensity of use (IU) curves for steel and other commodities are a well known phenomenon in development economics, (one of the best books on the subject is John Tilton’s World Metal Demand). As GDP rises, economies make more metal intensive investments and consume more metal intensive goods. As the economy continues to develop Intensity of Use peaks and then gradually declines to a steady state level. (Check out Slide 28 of this presentation for a graphic of the phenomenon in the US). There is plenty of inadequacy to the IU curve, such as its over concern with volumes, but it is a well accepted concept and China does not yet seem to be unusual enough to lead to the conclusion, as the World Bank seems to, that it is a developmental anomaly that other developing countries will not follow.
There’s other evidence to support this. A few years ago some Chinese researchers examined industrial development in the US, Japan, South Korea and China to estimate use of steel during a couple of key periods of economic development. They did so to try to understand how much steel China would need to develop its economy. The results are shown in the slide below.
The slide shows two periods of GDP development, from $3,000/capita to $5,000/capita in the top half of the table; and from $3,000/capita to $15,000/capita in the lower half. The first transition (from $3K to $5K) occurred in the US between 1878 and 1905, in Japan between 1941 and 1960, in Korea between 1971 and 1978 and in China between 1995 and 2004. The table also shows a variety of variables for each geography for that same period of development including the number of years the period of transition took to complete, the gross aggregate steel consumption in all those years, the population in the terminal year and the per capita steel consumption for the period.
This chart was compiled by China Metals after China had achieved the milestone of $5K/capita GDP. In other words, it’s after the fact. There are a couple of things to note. The later an economy develops, the faster it develops. China achieved in 9 years what the US economy at the end of the 19th century took 25 years to achieve. Second, the later the economy develops the less steel it uses. China used about 1.3 tonnes per capita throughout the period compared to almost 2 tonnes for the US. But then it is also important to note that two processes of industrialization separated by almost a hundred years each needed between 1.3 and 2 tonnes of steel per capita to be accomplished. Steel is still essential to economic development.
The lower portion of the slide makes some similar calculations but for a period China has yet to complete, the passage from $3K to $15K/capita GDP. Using some of the relationships developed in the upper portion of the slide, the analysts forecast that China will achieve the next developmental transition between 1995 and 2025. In doing so it will consume some 13Bn tonnes of steel or about 10 tonnes/capita. This compares to about 16 tonnes/capita for the equivalent developmental period in the US. This analysis implies a structural requirement for that amount of steel for China to achieve that amount of economic development. So far, from 1995 to 2008 or about 45% of the period between 1995 and 2025, China has consumed about 3Bn tonnes or less than 25% of the 13Bn tonnes suggested by the analysis of the Chinese researchers. In other words, Chinese steel intensity would have to go up not down if this forecast is right.
Of course they could be wrong about China’s ultimate steel requirement and almost certainly about the amount of time China will take to achieve the $15K/capita GDP target. But there’s nothing in the recent diversion from China’s phenomenal development trajectory to suggest that China will not ultimately need this amount of steel if it wants to continue to grow and develop its economy. Or that other countries, such as India, won’t need similar levels of steel intensity to grow in like fashion.