If beaten up Canadian investors are looking to assign blame for the bruising suffered by their portfolios of late, they could do worse than point an accusatory finger at China. The resource super-cycle that drove valuations so much higher over the last decade is now hobbling along at a snail’s pace and China is a big part of the reason why.

A slowdown in China’s economic growth is exacting a heavy toll on resource-based economies like Canada’s. Domestic coal mines are being shuttered due to tumbling coal prices. In Ontario, hopes to mine chromite deposits in the so-called Ring of Fire are fading as steel markets continue to weaken. At the same time, British Columbia’s plans to ship liquefied natural gas to Asian markets are being scuttled as LNG prices come off their highs. Similarly, lower oil prices are prompting Big Oil to shelve plans for multi-billion dollar oil sands projects in northern Alberta.

Seeing a simultaneous pullback in spending on big resource projects isn’t a coincidence. Look around the world at what’s happening in the resource space and it’s easy to see that new sources of supply aren’t helping prices. Consider the oil market, for one, where prices are now treading at four-year lows. Part of the reason for the decline is all of that new oil flowing from fracked shale formations in places like North Dakota, Texas, and southeast Saskatchewan. It’s often said that the best cure for high prices is high prices and that’s exactly what’s happened to oil after the big run up to $147 a barrel. Indeed, an extended super-cycle made new sources of supply economically viable in nearly any resource market you care to name.

While supply is certainly part of the equation, the much larger culprit behind today’s weakening commodity prices is actually demand. Over the last decade, new projects were developed based on a belief that global demand would continue to increase at more or less that same pace as it had prior to the last recession. Even a quick glance at what’s going on globally shows that’s just not the case.

A slowdown in many of Asia’s major economies is a big part of the reason why. After three decades of averaging annual economic growth in the double digits, China has come to be a dominant player in most resource markets. Until recently, Chinese demand only ever seemed to push prices higher. However, such an out-sized reliance on a single market is a double-edged sword. One look at commodity prices these days shows the blade is now slicing in the other direction.

Consider coal, for example. China consumes more coal than any other country in the world. No surprise, then, to see that coal prices have fallen in half as its economy has slowed down. For oil, where Chinese demand is a little more than 10 percent of the global total, prices have dropped by about a quarter. If China’s economic growth continues to grind lower prices for coal, oil, and a raft of other commodities remain vulnerable to further declines

The official word from China’s National Bureau of Statistics says its economy grew at a 7.3 percent annualized pace in the third quarter. It’s the slowest rate in more than five years. It’s also widely speculated that even those modest numbers might be artificially inflated to serve Beijing’s political interests. Veracity of the data aside, the idea of immutable Chinese economic growth that so dominated the thinking of resource markets in recent years is now off the table. The Conference Board of Canada recently forecast that China’s economic growth will slow to an average of less than 5 percent over the balance of the decade and then further downshift to less than 4 percent between 2020 and 2025. If that’s the new speed limit for China’s economy then investors may be a long way from seeing the bottom in resource prices.

That’s a particularly challenging outlook for Canadian investors and the TSX, which is weighted so heavily towards energy and resource stocks. The energy sector, for example, has underperformed the TSX Composite by more than 11 percent in the last year. If the broader market is going to rebound to new highs, it will have to rely on strength from other parts of the economy to get there.

In light of the Harper government’s love affair with the energy sector in general and the oil sands in particular, an end to the global resource super-cycle is more than a little chilling for Canada. Ottawa has bet heavily that Asian demand would continue to support ever rising oil prices and, by extension, bitumen production. What happens to Canada’s economy if that doesn’t come to pass?

  • jim patterson

    It means the Canadian dollar falls and Ontario gains a lot of manufacturing back.

  • rigpigpetey

    yup, and thats a good thing, “IF” the unions guys don’t try immediately to run up their demands for time accrued

  • scissorpaws

    You know things are bad for the oil industry when the Rockefellers are dumping their stock. Indeed, with fusion just around the corner – no, really this time – I’d be dumping all my hydrocarbon stock too, if I had any. I’m guessing things won’t pick up until the sadomonetarists decide to start spending money and get some inflation happening in various currencies. China would have huge demand if they’d start paying everyone a living wage and that could serve to jump start a vibrant business cycle.

    And no, this doesn’t bode well for manufacturing in Ontario. With bunker crude dirt cheap shipping costs from China/Vietnam will be virtually nil, and if the Loony goes low enough to compensate you’ll have fresh new problems.

  • http://olduvai.ca Steve

    It’s no secret that China propped its large growth over the past
    decade or so with highways to nowhere and cities that sit empty. They seem to have taken the insanity of vertiginous credit expansion even further than the US as can be seen by the extreme level of mal-investment. It would not be too far off the mark to guess that their economy will suffer an extreme shock to the downside; in fact, it seems to have already started (see this: http://olduvai.ca/?p=204).

    A positive spin on this would be that the toxic impact of continuing resource extraction and its use will be mollified with less of it; not that that will keep us from feeling the significant negative effects of all the greenhouse gases we’ve already pumped into the atmosphere.

    Canada’s economy is probably going to suffer immensely as this latest economic contraction goes global, just as it did during the Great Depression. The bigger question might be will we follow the same path as then and allow the-powers-that-be to lead us to war with some manufactured crisis or distant boogeyman? They certainly seem to be paving the road towards that endgame be it ISIS, Russia, homegrown terrorists, etc….history may not repeat itself, but it sure can rhyme.

    Infinite growth on a finite planet, what could possibly go wrong?


  • Instincts

    Exactly, if the unions continue with their greed, it could spell a lot of lost opportunities.