China: Cold Water for Overheated Commodities?
Oct 24, 2003
Summary
stratfor.biz
Concerned by industrial overheating, Chinese authorities aim to slow down lending and investment in key sectors. Though the pullback is not likely to be immediate, a concerted effort by Beijing to cool the economy could stabilize commodity prices and shipping rates next year.
Analysis
Warning that China's economic growth is surging to unsustainable levels, the State Development and Reform Commission (SDRC) has called for actions to dampen overheated industrial sectors such as steel, aluminum, cement and vehicle manufacturing, China Daily reported Oct. 23. The call follows earlier government warnings about potential economic overheating and the need to cool down lending -- especially in real estate and construction.
Commission official Ma Liqiang has warned that China's robust economy could be hurt if surging investments and production in these sectors is not slowed. Another commission official has warned that rapid growth is putting a strain on transport and power supplies, driving up the prices of raw materials and leading to excess capacity in industries such as aluminum.
Excess capital, loose lending policies and the introduction of mortgages in 2001 have driven a massive real estate development and construction boom in China's big cities, which in turn has fueled demand for construction materials such as steel and concrete. Equally massive foreign investment has fueled industrial manufacturing.
The government began to cool down bank lending in August, in part by imposing new restrictions on property lending. SDRC officials said Oct. 23 that the government also has taken measures to curtail the expansion of aluminum production by limiting approvals for new smelters, tightening financing for new projects and closing factories that pollute the environment. Similar restrictions could be applied to small automobile manufacturing plants and steel factories.
The real estate and industrial boom, along with a flood of investment, has driven the wider economic expansion. China's National Bureau of Statistics upgraded its GDP growth forecast to 8.5 percent for 2003 after China's economy grew at an annual rate of 9.1 percent in the third quarter. Many economists claim the government actually is understating growth. Citing Wu Jinglian, the director State Council's Development Research Council, the China Securities Journal reported Oct. 24 that growth for 2003 likely will be around 10 percent.
Torrid growth has led to a tremendous surge in demand for a number of metals, especially steel and aluminum. Meeting that demand has required massive increases in raw materials imports of mineral ores and material inputs -- including ferroalloy, coke, pig iron, iron ore, magnesium ore, nickel and copper ore. China accounted for 95 percent of growth in global demand for steel, 99 percent for nickel and 100 percent for copper from 2000 to 2003, the Far Eastern Economic Review (FEER) reported this month. Demand has been met by a combination of rising imports and domestic production, though China's limited domestic sources for raw materials have put an increasing emphasis on imports.
As a result, China has been fundamentally reshaping global commodities markets, solidifying its position as a primary mover within those markets. Chinese demand, especially during the past year, has caused global prices to spike for products that include iron ore, copper, nickel and coke. Nickel prices are up around 45 percent so far this year. In the past 12 months, the spot-market price for grade-A copper has increased by nearly a quarter, while prices for alumina -- a raw material of aluminum -- have almost doubled. The average price for coke is expected to hover between $110 to $120 per ton this year, significantly above the $95 to $105 per ton prices of 2002, the Pittsburgh Tribune Review reports.
The rapid growth in Chinese imports also has led to a sharp surge in shipping rates, as shippers struggled to keep up with China's seemingly insatiable demand. In the past year, the cost of chartering a 170,000 ton-capacity carrier from Brazil -- a top provider of iron ore to China -- has nearly quadrupled, FEER reports.
China's growing concern about economic growth -- and the possibility of developing bubbles in the real estate, manufacturing and banking sectors -- likely will extend to the future direction of key commodity prices.
Beijing's concerted effort to slow lending and construction of real estate and new factories could lead to a mid-term stabilization in global prices of mineral ores and metals. Shipping rates could follow.
It will take time for a lending slowdown to work its way into the property and manufacturing sectors. As a result, the commodities markets likely will not feel slowing growth in demand until early 2004. Even then, Chinese growth will still be so strong that prices are less likely to drop so much as to stabilize. However, if China is serious about limiting new lending and construction and scaling back the pace of industrial growth, 2004 shouldn't see the China-driven price spikes of the past year.
Though mineral ore prices certainly will be affected, the greater impact might be felt on global markets for refined metals -- especially steel and aluminum, where Chinese production capacity has grown sharply in order to meet domestic needs. Chinese steel production rose by more than 19 percent in 2002, while imports jumped by 42 percent -- figures that should continue throughout 2003, the Center of Electronic Information of China reports. Growth in aluminum imports is expected to rise by more than 20 percent for the second consecutive year in 2003, while production is expected to top 33 percent after growing 17 percent in 2002.
As China's needs begin to level, the reduced demand could leave excess slack in the global market for both products, especially considering that new production capacity might continue to come online to feed future expectations of industrial investment and growth.
Any leveling of prices will depend on the Chinese government's willingness and ability to slow the investment boom. The government is beginning to demonstrate its will; time will tell if it has the way. |
