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Booming economy fuels resource
demands
PERTH - China may
be coming off the boil but it is still the hottest
thing in the resources kitchen.
The
awakening economic dragon's voracious appetite for
raw materials to fuel its rapid industrialisation
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 for 16 years and aluminium 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
(ASX:RIO) chief executive 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 industrialising.
Naturally, as incomes grow people want those
little luxuries such as a washing machine and an
air conditioner, 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 feeds
into demand for raw materials.
But China's
recent growth also received a boost from a number
of short-term factors, Mr 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 "sterilised" with purchases of
securities like government bonds the result is an
increase in the money supply. "Some of that yuan
is not being sterilised properly, so you're
getting a short-term liquidity driven boom," Mr
Thurtell said. "But dissecting that short-term
influence from the bigger picture, long-term
structural factors such as the WTO and
industrialising 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 [still] pretty strong."
China's industrialisation is showing
similar trends to the industrialisation of other
major economies during the last century, such as
Japan. But despite its one party Communist regime,
China - a member of the World Trade Organisation
(WTO) - is more open to foreign investment than
either Japan or Korea were at similar stages in
their development, Mr 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, Alcoa Australia
managing director Wayne Osborn said recently.
"What's clear is that we're in the midst of a
global market transformation and growth not seen
since the 1950s ... this makes for
once-in-a-generation opportunities," he said.
It's difficult to overestimate the impact
China has had on Australia's resources industry.
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 $A11 billion
($US8.6 billion) and accounted for 10% of 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%, HSBC said. 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. "It is highly unlikely that
commodity exports would continue to increase at
anything like these rates, not least because the
base to which the increases are added is becoming
so big," it said.
China's rise to
prominence as a major market for Australia has
been astonishing. 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 if a bilateral free trade agreement passes,
which is considered likely, China may well
overtake Japan as Australia's biggest export
market within a couple of decades.
(Asia
Pulse) |
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