Chinese economic growth is slowing, as expected, in the post-Olympic period. This will drop world commodity demand below the early 2008 peak. Together with the ongoing catch-up is commodity supply, the recent tumble in many commodity prices is likely to be sustained and continue, although more gradually. US Construction materials inflation will drop to 6-7% through the end of 2009 after soaring over 20% early in 2008.

The role of booming economic growth in China, India and other developing countries has become well known in the last few years. Other forces also contributed to the 2008 commodity price surge, including the depreciation of the $US, average plus economic growth in the US, Europe and Japan and political disputes that disrupted energy and mineral ore supplies. But the 20% plus growth in Chinese commodity demand was heavily for domestic infrastructure and domestic durable goods consumption.

Now the Chinese impact has reversed signs due to a more expensive currency, weaker export volume to US, Japanese and European market in or nearing a recession and slower growth in capital investment within China. 7% CPI inflation, a 50% drop in the Shanghai stock market index and weakening export prices are quickly limiting demand for added industrial capacity and the ability of public funds to build infrastgructure.

Chinese GDP growth was 11.7% last year, briefly topping 13%. GSP growth slipped to 10.6% in the 1st quarter and 10.1% in the 2nd quarter with widespread predictions that it will average 8-9% next year. The official GDP target remains 10% so China has had to make several major changes in economic policy as soon as the Olympics ended.

Bank lending is now being encouraged to spur investment instead of being discouraged to limit investment spending. Sagging textile exports will now be subsidized. More jobs in t-shirt factories are acceptable when export orders for other products are harder to get. Other policy changes are likely to boost spending including reducing the appreciation rate of the Chinese currency.

The impact on commodities used for construction materials has already begun in the energy and some metal markets where current prices are down 20% from peak levels earlier in the summer. The impact on steel prices is coming but has not yet reached metal distributors.

This is the consensus outlook but there is still risk of both higher and lower Chinese GDP growth with the usual magnified spillover to commodity prices. There are enough “command” rather than “market” still in the Chinese economy to permit the government to force 10% GDP growth for an extended period with an eventual heavy cost in added inflation. At the same time, the seemingly well ordered Chinese economic machine may break down under pressure from social unrest as it has at least three times since world war II.

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