From the Far Eastern Economic Review
TALK TO ANALYSTS, traders, shippers or anyone else connected with the commodity markets about China's demand for raw materials and you hear the same word time and again: insatiable.
For most of the past three years, while the developed economies have slumped, China's ravenous hunger for imports to feed its industrial revolution has been the only thing supporting global metals markets. Now, with recovery emerging in the developed countries, analysts fear that China's surging demand will contribute to a global supply shortfall that could drive prices of metals high enough to put the brakes on the country's economic growth.
"China has an almost insatiable demand for raw materials. In almost any commodity market you can think of, especially metals, China is the driving force," says Mike Komesaroff, principal of Australian consultancy Urandaline Investments and a 25-year veteran of the mining industry.
China's demand spans all metals markets from aluminium to zinc. Between 2000 and 2003, China accounted for 95% of the growth in global demand for steel, 99% for nickel and fully 100% for copper. This year, China's headlong economic growth is expected to swallow roughly a quarter of the world's production of key industrial metals.
Unsurprisingly, prices are going up. Over the last 12 months the spot-market price for grade-A copper has risen nearly 25%, while prices for alumina, a raw material of aluminium, have nearly doubled. And many industry participants think that this is only the beginning. "This situation will last for the next couple of years," says Richard Elman, chief executive of Hong Kong-based commodity-trading house Noble Group. "Certainly next year, and probably the year after, the price of raw materials will increase."
The most serious shortage is likely to be in the iron-and-steel market. China needs an ever-greater quantity of steel to build its new economy, and to meet the demand, steel mills are being built all over the country. In the last four years, China has added 120 million tonnes of steel-production capacity, and has almost as much again currently under construction.
But to produce steel, those mills need to be fed with iron ore, and China simply can't mine enough of its own. This year China is expected to ship in 150 million tonnes of iron ore from the rest of the world, up 31% from 2002. By the end of the decade its import requirements are expected to have more than doubled to 318 million tonnes.
That demand is already placing huge stress on the global supply chain. Ports in Australia and Brazil, the two biggest exporters of ore to China, are struggling to handle the tonnage, and traders fear a shortage of bulk carriers. As a result, freight charges have rocketed. In the past 12 months the cost of chartering a 170,000 tonne-capacity Cape-size carrier from Brazil to China has nearly quadrupled to $59,000 a day from $15,000, adding billions of dollars to China's annual import bill. "I've been in the business for 21 years and I've never seen anything like this," says Tim Huxley, managing director at Hong Kong shipping broker Clarkson Asia.
There are also supply constraints at the ore's source. Although big miners like Brazil's Companhia Vale do Rio Doce and Australia's Rio Tinto and BHP Billiton are investing heavily to expand existing mines, the increased production is unlikely to reach the market before the end of next year. That's bad news for China's ore buyers, who, having repeatedly walked away from long-term supply contracts as prices softened, are now forced to pay spot prices in a rising market.
China's steel producers enjoy enviably high margins, and can afford to pay a bit more for their ore. But the problem could turn out to be far more serious than eroded profitability at China's steel mills, believes Jim Lennon, commodities analyst at Macquarie Bank in London.
"China desperately needs infrastructure to keep growing. If it doesn't keep building roads, ports and power stations, growth will grind to a halt," he warns. And unless China can import sufficient iron ore from the rest of the world, it simply will not be able to carry on building.
"If the developed economies recover, it will be the first recovery we've ever gone into with a raw-materials shortage already in place," Lennon says. "It will be a very close-run thing whether or not the world can meet Chinese demand." |
