Scraponomics Episode 84: How China Affects the US Economy

“The assumption is if you build it, they’ll come…but no one’s coming.” — Lesley Stahl, Correspondent on 60 Minutes

Last week, we briefly touched on how the market for ferrous iron plummeted in February, and how the strength of the US Dollar has been one potential reason. Today, let’s look at another potential reason: China.

China has experienced a lot of economic growth over the past few years. During that period, Chinese manufacturers needed a large amount of raw material to fulfill their demand. Those manufacturers buy newly re-melted steel from mills and refineries all over the world, including the US, who purchase scrap material from processors all over the world to make the new steel.

Here’s the problem. It wasn’t an authentic demand created by the market. The Chinese government spent the equivalent of about $2 trillion to build entire cities comprising of homes, apartments, and malls with the hope that the rising middle class would purchase them. But no one has moved into the cities. Rather, people have bought the homes as investments, assuming that the property values will continue to rise, since they have historically risen at a faster rate than inflation. Sound familiar? This caused an economic housing bubble in China with a great potential of breaking. Google 60 Minutes China’s Ghost Cities for some surreal video on this.

Here’s where the scrap industry, and you, are affected. When there’s no more tax money left to build these cities, the development has to stop. This creates a surplus of material at mills and refineries, which means they have less of a demand for scrap material from processors. This surplus may then force the price of commodities to naturally drop in an effort to acclimate to what was an artificial demand.

Believe it or not, another country’s policies can affect the economic state of the entire world. Our economy is truly global. The good news is it tends to adjust with time.

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