How China's Population Shift Could Deflate Future Steel Prices

Hearkening back to our conversation about how China’s political and social policies are likely to affect growth in the coming decades, we must consider what China’s one-child policy has done to the demographic landscape in the world’s second-largest economy. Most importantly, we should figure out what this could mean for future steel, copper and zinc demand.

The changing demographics behind the workforce serve as the looming backdrop for more recent news, reported by Reuters, that HSBC’s flash PMI for China (a sneak preview, so to speak, of the most recent index value due out June 1) has hit a 10-year low. The PMI figure, down to 51.1 in May compared to 51.8 in April, is mainly due to manufacturers pulling back their inventories in addition to slowing their new business activity, according to HSBC’s chief China economist Qu Hongbin as told to Reuters. Although much of the slowdown is a reaction to official policy that is in turn designed to stanch inflation, some believe that inflation will still be a major factor in global price rises, as factory output overall continues its upward trend (the biggest concern, perhaps, for the aluminum market; Chinese copper imports, however, were reported to be down 16.6 percent from last month because banks haven’t been extending credit for new projects.)

So even though economic pullback should not be directly linked in the short-to-medium term to demographic sea changes, the latest Chinese census numbers are showing quite a picture for the future. A recent piece in the Economist highlighting the challenge of an aging population observes that China will be the “first country to grow old before it gets rich.

According to their report, based on Chinese census data, both the population growth rate and the fertility rate have been “steadily declining, with the 1.8 percent fertility rate considered by some to be an overestimate. Even with many citizens breaching the one-child policy (whether sanctioned, as it is in special cases, or not), the long-term forecast doesn’t look too good the numbers imply that the dependency ratio, or the proportion of the population comprising young citizens and seniors, will begin to rise and the work force will decline. “Already, the proportion of people aged over 60 has increased from 10.4% in 2000 to 13.3% now, according to the article. “Those under 16 now make up 16.6% of the total, down from 23% in 2000.

The connection to metals is thus: many think that the growth policy for the Chinese economy should move away from investment and labor-heavy manufacturing primarily to keep up exports; but the aim of their newest push to increase domestic consumption and spending is not only being thwarted by inflation, but by the aging population, which is concerned about its future. Sure, there’s a rising, young, better-educated middle class, but will they grow as fast as the older class?

Another question to think about: will repeal of the one-child policy even help? President Hu Jintao recently intimated that the administration will “uphold and improve the policy, according to the Economist, and that some took that as a sign of future flexibility. China’s government claims it has so far “averted 400 million births due to the policy but that could represents a good amount of potential demand for all types of commodities, not to mention metals used in construction and automotive applications among others. That would mean that raw material and primary metal producers could favor a bigger population that could consume more, raising their prices. Conversely, that would make global industrial supply much tighter and up the volatility. So, ultimately, will it serve the global markets to let the Chinese multiply more rapidly?

Still to come: a comparison between China and another emerged power economy with a rapidly multiplying population (yet less-established educational infrastructure) India.

–Taras Berezowsky

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