A worker walks on a steel girder at a building under construction in Nanjing, Jiangsu province, China.Sean Yong/Reuters
In this teeming megalopolis in China's western interior, growth is in the air. You can smell and taste expansion in the heavy, hazy and dusty atmosphere of Chongqing, as scores of cranes power a slew of infrastructure projects remaking the city's skyline where the Yangtze and Jialing rivers meet.
The prospect of a marked decline in commodity demand from China, the world's largest consumer of raw materials, seems preposterous standing in the centre of what by some measures is the largest municipality on the planet, boasting a population of about 33 million people.
"I often tell my colleagues, if I am not in Chongqing for three months, it will change so much that when I return I will be lost," says Liu Xiaoning, a sales manager at Chinese shipping and logistics giant Cosco.
Yet concerns of weakening demand from China and other fast-growing emerging markets in Asia are partly behind the devastating rout in commodity prices this week. Oil prices fell a staggering 8.6 per cent to below $100 (U.S.) a barrel on Thursday alone, the biggest single-day decline in the oil price since the collapse of Lehman Bros. and the global financial crisis, more than two years ago. Copper skidded more than 6 per cent in two days. Wheat and sugar took it on the chin, while gold, normally a safe haven, fell sharply from record highs. And silver, which touched a record high of $50 an ounce in late April, has lost more than 30 per cent of its value since then.
Although there was no single catalyst to spark the selloff, increasingly aggressive moves by Asian governments and central banks to rein in surging growth and high prices are forcing investors to rethink their tolerance for risky commodities. An ever-more hawkish tone from China's policy makers coupled with a larger-than-expected 50-basis-point rate increase from India's central bank helped to spur a raft of selling by hedge funds and other institutional investors. (A basis point is 1/100th of a percentage point.)
It is not just the prospect of slowing growth in Asia owing to monetary tightening that has hit material prices. There is also some hard data weighing on commodity sentiment. China's Purchasing Manager's Index (PMI) in April, which traditionally serves as both a gauge of the strength of the spring revival in economic activity and the peak for the calendar year, actually declined for the first time during the month since 2005.
China's April PMI fell 0.5 points to 52.9, representing the weakest showing for the measure of China's factory production during April since China began calculating it more than six years ago. It appears interest rate hikes and stiffer lending requirements imposed by policy makers are finally starting to take effect.
"I think the headline news from China has not been helpful for commodities lately," said Na Liu, founder of CNC Asset Management Ltd. and an adviser to Scotia Capital.
April's PMI was an "undeniable disappointment," he added. "This is because the data will raise concerns on the sustainability of the spring revival, particularly in the context of an emerging shortage of energy supply."
A long-time commodity bull, Mr. Liu is maintaining a relatively cautious "market weight" call on the global raw materials sector regarding Chinese demand.
On Friday, China's government warned the country could face widespread electricity shortages during the summer. Such constraints could hamper construction and manufacturing activities. While the looming electricity shortages should boost China's demand for coal and diesel, it will hurt general investor sentiment as it suggests policy makers will have to continue tightening.
Still, almost no one is predicting China's economy is set to fall off a cliff. Most GDP growth estimates for 2011 range from 8 per cent to 9.5 per cent compared with 10.3 per cent in 2010. First-quarter gross domestic product eased slightly to 9.7 per cent and strategists at RBC Dominion Securities expect growth "will moderate but remain at solid levels over the next few quarters."
While aggressive policy measures are starting to slow sales in China's soaring property market, construction activity could be supported by government-ordered development of 36 million new social housing units, enough to shelter about 20 per cent of the country's urban population.
"This will require a lot of capital investment in the construction sector. Meanwhile, there are still massive investment plans for rural infrastructure, development in inland provinces and some high-tech industries," Yan Wang of BCA Research said in a recent report.
Yet there are still concerns about China's sky-high investment rate (currently 47 per cent of GDP) and a potential misallocation of capital that could be revealed as the cycle of loose lending policy comes to an end. As Bay Street and Wall Street have soared over the past 18 months, Chinese stocks have failed to rally, points out Arthur Budaghyan, also of BCA Research.
"The post-2008 growth boom in China has largely been credit driven. When credit and liquidity are abundant, it is hard to discern weak spots in the economy. They become apparent when liquidity tailwinds retreat," he said.
Nonetheless, influential investment bank Goldman Sachs, which last month forecast the downturn in oil and other commodities, said on Friday oil could bounce back and top recent peaks in 2012, owing to supply tightness.
"It is important to emphasize that even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year," the banks' analysts said in a research note.
Spectacular declines in the price of crude are not unusual. In percentage terms, Thursday's 8.6-per-cent oil price plunge ranks only 30th in one-day tumbles since 1983.
With files from reporter Nathan VanderKlippe in Calgary and Reuters