If China’s economy is growing at 7% or more per year, why has the price of cement there dropped by 25% in the last two years?
You can’t build anything permanent without cement. It’s a great indicator of how the underlying, real economy is actually doing: If people are buying a lot of cement then it means they have the cash to build large, new, permanent objects. Houses, roads, bridges and cities. If building and construction are on the decline then the price of cement should fall.
This is what Chinese cement looks like right now, according to a fantastic note to investors from Macquarie’s Chief China Economist, Larry Hu:
The Chinese government is “serious” about keeping GDP growth at 7%, says Hu.
Macquarie reckons “fixed asset investment” growth – spending on infrastructure and buildings basically – should be steady at about 20% growth each period since 2013. Official numbers say China GDP remains above 7%:
This doesn’t make sense … unless you are one of those people who believe that China is lying about its GDP growth. Outside observers suspect it may be as low as 4% in reality. That’s still pretty good growth in an economy of that size.
But China’s stock market is collapsing, it has a massive debt overhang, objective indicators like electricity consumption look soft, and the country is about to go through a generational reversal that will erase its population growth advantage.
And now cement prices have collapsed at about the same time as … Chinese metal prices, as Goldman Sachs noted recently:
- Goldman Sachs
None of this looks good, unless you believe that the Chinese have figured out a way to grow their economy at 7% a year without using concrete or metal.