March 25, 2005
Asia Times
PERTH - China may be coming off the boil but it's still the hottest thing in the resources kitchen. The economic giant's voracious appetite for raw materials to fuel its rapid industrialization has returned commodity prices to levels not seen in years. Nickel is at a 15-year high, copper and tin at eight-and-a-half-year highs, silver has not been so expensive in 16 years and aluminum is at a six-and-a-half-year peak. Iron ore prices will rise by 71.5% when the new contract year starts next month, while prices of coking coal, also used in steel production, will soar by 120%.
Underpinning all this has been a surge in Chinese consumption, which has accounted for 40-50% of demand growth for some commodities and caught most commodity analysts short, Commonwealth Securities analyst David Thurtell said. China's economy grew by around 9.5% in 2004 despite government curbs on investment and credit aimed at reining it into more sustainable levels. Beijing will again apply the brakes this year to meet a gross domestic product (GDP) growth target of around 7-9%, according to Australia China Trade Pty Ltd director Juyan Feng.
It is a prospect the head of the world's second-largest diversified mining company, Rio Tinto Ltd, Leigh Clifford, has described as a welcome development for commodity markets, which are already stretched to meet demand. But the true picture of China's recent growth is more than simply an economy of 1.3 billion people rapidly industrializing. Naturally, as incomes grow people want those little luxuries such as washing machines and air-conditioners, and as people migrate from rural areas to the cities in search of a better life, the demand increases for infrastructure such as roads, bridges, hospitals and schools. All of which feed into demand for raw materials.
But China's recent growth also received a boost from a number of short-term factors, Thurtell said. "They eased monetary policy when SARS hit in early 2003, roughly at the same time as the Iraq war," he said. "When the war ended and confidence picked up, their monetary policy was still pretty loose."
The Chinese authorities have also pegged the yuan against the US currency by buying dollars and selling the yuan. Central bank purchases of foreign currencies are paid for with flows of their own currency into the private sector. Unless the intervention is "sterilized" with purchases of securities like government bonds, the result is an increase in the money supply. "Some of that yuan is not being sterilized properly, so you're getting a short-term liquidity-driven boom," Thurtell said. "But dissecting that short-term influence from the bigger picture of long-term structural factors and industrialization is difficult, so people tend to focus on the latter rather than the short-term influences. It's not going to remain as strong as it has been for the last couple of years forever, but if it just comes back to 8% or 9% growth, that's pretty strong," according to Thurtell.
China's industrialization is showing similar trends to that of other major economies in the last century, such as Japan. But despite its one-party communist regime, China is more open to foreign investment than either Japan or Korea were at similar stages in their development, Thurtell said. Adding to China's impact on global growth, the world's urban population is growing by 60 million each year - equivalent to building a new Paris or Beijing every two months, said Alcoa Australia Managing Director Wayne Osborn. "What's clear is that we are in the midst of a global market transformation and growth not seen since the 1950s ... This makes for once-in-a-generation opportunities."
For instance, it's difficult to overestimate the impact China has had on Australia's resources industry, a country with which it is mulling a free trade agreement (FTA). At the end of the 1990s, China accounted for 5% of total Australian exports; by 2004, exports to China had almost tripled to just shy of $11 billion and accounted for 10% of Australian exports, according to HSBC. Almost all of that growth has been in raw materials, mostly in metals and minerals. Iron ore accounts for more than a sixth of total Australian exports to China, wool accounts for 10% and coal 5%. The value of iron ore exports grew by 41% between 2003 and 2004, while coal jumped 72% despite bottlenecks at the major exporting terminals, and nickel surged 88%, HSBC said.
Even at the end of the last decade, the tiny island nation of Singapore was a more important export market for Australia than China. But by the end of last year, China had overtaken the United States to become Australia's second-biggest export market, and HSBC predicts that with an FTA in the near future, China may well overtake Japan as Australia's biggest export market within a couple of decades.
(Asia Pulse)
http://www.atimes.com/atimes/China/GC25Ad02.html