London, 17 May 2011

Expectations that buoyant Chinese demand will drive commodity prices ever higher have been looking increasingly shaky, according to Capital Economics in London. For a start, China’s imports of many key commodities have actually been falling in recent months, partly due to a cyclical downturn. But in addition to this, there are solid structural reasons why China’s demand is likely to disappoint over the coming years.

"China is, of course, already the largest consumer of many commodities. In some cases, such as copper and tin, China now accounts for approximately 40% of total global demand. China has also been the source of more than 50% of the increase in global demand in the past decade for many commodities," says Ross Strachan, Commodities Economist with Capital Economics.

"But this has left these markets dangerously vulnerable to any slowdown in growth of Chinese demand.  In our view then, the recent sharp falls in prices are fully consistent with evidence that China’s commodity demand has dropped back and we expect further price declines. For example, China’s imports of soybeans, iron ore and many other commodities fell outright in April. Indeed, according to our estimates, overall commodity imports over the past three months were lower than the same period a year earlier."

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