China Woes Help the West

A lot of attention has been paid to the slowing of the Chinese economy and its effects on emerging market commodity suppliers such as Brazil. Bloomberg Business writes that the end result could be a plus for U.S. and Europe. The bottom line is that commodities are cheaper these days as China woes help the West.

[T]he slowest growth in 25 years in the world’s second-biggest economy is proving a boost for consumers and companies in Western Europe and the U.S., according to Neville Hill, co-head of global economics and strategy at Credit Suisse Group AG in London.

Here’s why. When China grew at double-digit rates, its voracious demand for materials drove up commodity and energy prices. That hurt the buying power of consumers in Western economies and weighed on corporate sentiment as rising costs hurt profits.

Now, that situation is being reversed. Plunging commodity prices are boosting European and American shoppers and spurring corporate earnings growth.

In essence China is exporting deflation but of a good variety. Imports from China are cheaper. Exports from the U.S. to China will be hurt but these exports are a tiny fraction of the U.S. economy. While Asia and commodity exporters across the globe suffer from the Chinese slowdown the China woes help the West. How long will the cheap commodity bonus last?

The Price of Oil

The price of oil moved up 4% last week due to potential supply disruptions in Libya and Brazil. But over the long term the major oil producers like OPEC, Russia and the USA are unlikely to cut back. When supply routinely exceeds demand prices fall and stay there. China is the second biggest consumer of oil in the world after the USA. As its economy slows so does its demand for oil and so China woes help the West by keeping demand below supply. CNBC puts the recent oil price rebound in focus.

Aside from the suspected build in U.S. stockpiles, there is still no sign that production is slowing from major oil producers such as OPEC, the Organization of Petroleum-Exporting Countries (OPEC).

Despite a sharp decline in oil prices from a high of $114 a barrel in June 2014 to their current level, OPEC, which is led by Saudi Arabia, has refused to cut production levels (which would support prices) and has regularly exceeded its 30 million barrels a day ceiling.

The stated reason for Saudi Arabia not cutting back on oil production is that they want to maintain market share. Another reason is that the Saudi royal family maintains control of the country by providing very generous social benefits. Essentially they are holding off the Arab Spring by bribing their citizens. Do not expect this tactic to end soon and thus the Saudis will keep pumping oil in excess of demand.

A Mixed Bad of Benefits and Pain

The China woes help the West in that they make consumer goods less expensive. However, commodity producers in the USA are hurting just like the folks in Brazil or Australia. The New York Times reports that the chill in commodity demand hits America’s heartland.

A thousand miles south of this gritty steel town on the Mississippi River, West Texas oil rigs have shuddered to a halt. Seven hundred miles north, mines in the Iron Range of Minnesota have been stilled.

The drilling rigs, with their deep underground pipes, once consumed much of the steel that Granite City’s blast furnaces could produce, while the mines supplied the raw material.

So now, more than 2,000 workers at the mammoth United States Steel plant not far from St. Louis are waiting to see if they will be next. This month, the company warned them it might be forced to idle the plant. Layoffs could begin around Christmas.

Caterpillar is laying workers off and the oil boom in the western Dakotas is slowing down. While China woes help the West it is a mixed bag of benefits for consumers and pain for those whose work it is to produce now-unwanted commodities.

China Woes Help the West PPT

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