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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.
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5. The bottom line is that commodities
are cheaper these days as China
woes help the West.
6. [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.
7. Here’s why. When China grew at
double-digit rates, its voracious
demand for materials drove up
commodity and energy prices.
8. That hurt the buying power of
consumers in Western economies
and weighed on corporate sentiment
as rising costs hurt profits.
22. 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).
23. 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.
24. The stated reason for Saudi Arabia
not cutting back on oil production is
that they want to maintain market
share.
25. Another reason is that the Saudi royal
family maintains control of the
country by providing very generous
social benefits.
31. The New York Times reports that
the chill in commodity demand hits
America’s heartland.
32. A thousand miles south of this gritty
steel town on the Mississippi River,
West Texas oil rigs have shuddered
to a halt.
33. Seven hundred miles north, mines in
the Iron Range of Minnesota have
been stilled.
34. 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.
35. 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.
36. This month, the company warned
them it might be forced to idle the
plant.
38. Caterpillar is laying workers off and
the oil boom in the western Dakotas
is slowing down.
39. 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.