Weak commodity prices add uncertainty to Chinese economy

Declining steel prices have greatly offset the benefit of lower ore prices. Losses of China Iron and Steel Association members widened in the January-May period to 16.5 billion yuan (about $2.7 billion).

Weak commodity prices will increase deflation risk where prices of industrial products have contracted for years. China's producer price index (PPI) has fallen for 40 straight months.

Peking University economist Su Jian believes weak commodity prices drive down the prices of finished products, which delays investment and postpone consumption. Weak demand caused by shrinking business activity will in turn sink commodity prices.

"To avoid such a vicious circle, we need more expansionary policies," said Su.

End of "super cycle"?

Commodity prices boomed in the early years of this century. Unlike a typical price cycle, the demand-driven increase has been called a "super cycle", perhaps the fourth in the past 150 years. The World Bank attributes this cycle to strong growth in emerging markets, particularly in China and India.

Recent price tumbles came when a faltering recovery in the global economy cut commodity demand and the market expected oil supplies to increase as Iran export restrictions may be eased.

The World Bank found that demand from China and, to a lesser extent, India, over the last two decades significantly raised global demand for metals and energy.

China still stands well below Organization for Economic Cooperation and Development levels of per capita consumption of primary energy; somewhat below for grain and edible oil; and in line with the OECD average for metals.

"If China and India catch up with OECD levels... demand for metals, oil and coal could remain strong," said the World Bank.

China's warming real estate market could be one of the engines. In June, fewer cities reported new home price drops, and home sales in top-tier cities grew.