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Commodity prices
skyrocket
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) |
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