China’s insatiable appetite for commodities helped fuel 2004’s impressive rally in natural resources sector. A weak US dollar, which usually means a rise in the price of commodities such as oil, gold and copper – since they’re measured in greenbacks – also helped. But will 2004’s hefty commodity gains be repeated in 2005? What will happen if the dollar rallies?
Much depends on the continuation of China’s impressive economic expansion. It was widely rumoured that China would try and “cool off” its fast-growing economy by restricting construction spending. But in late January, Beijing’s National Bureau of Statistics reported that China’s economy grew at 9.5% in the fourth quarter of 2004. This followed a 9.1% increase in the third quarter, hardly signs of an economy settling in for a “soft landing”.
Demand for steel is at the forefront of China’s boom. The Organization for Economic Cooperation and Development (OECD) reports that global steel consumption was up 8.8% in 2004 to 935 million tonnes. Chinese steel consumption grew even faster, by 10.7%. This demand for steel has driven up a host of other commodity prices higher, including the price of iron ore, which is essential in steel production.
Iron ore prices rose by 19% in 2004. Australian iron-ore giant BHP Bilition racked up US$9 billion in sales to China alone. BHP’s robust trade with China is also giving rise to a cottage-industry of smaller iron-ore miners in Australia’s wide open Western spaces.
For example, iron-ore exporter Portman sells some 75% of its iron ore directly to China. Portman’s access to the Chinese market is one reason why US-based iron ore miner Cleveland-Cliffs launched a $465 million bid for Portman in December. Other up-and-coming Aussie iron-ore miners include Mount Gibson Iron Ltd and Fortescue Metals.
What many investors may not know is that in addition to consuming iron ore and steel, China has quickly become a top global producer of coal and steel. Both industries help China meet its own demand. They also put China in the position of exporting commodities to other growing markets in Asia, including India.
Since 2001, China has added enough new steel making capacity to match the entire US steel sector, according to data from the International Iron and Steel Institute. World crude steel production rose by 8.8% to over 1 billion tonnes in 2004. If you exclude China, however, world steel production would have only risen by 4.4%. The OECD reports that Chinese steel production rose by a whopping 22.5% in 2004 to over 270 million tonnes, easily making China the world’s largest steel producer.
By 2006, in fact, China will produce 30% of the world’s steel annually and over 300 million tonnes a year.
Another example of rising Chinese commodity production is coal. China produced over 1.9 billion tons of coal in 2004. According to Australia’s Gladstone Centre for Clean Coal, 70% of global steel production depends on coal feedstock and over 600 million tons of coal are used annually in blast furnaces.
Coal is also crucial to electricity generation. Over 38% of global electricity supply is generated from coal-fired furnaces. And although China is one of the world’s top-three coal producers (along with India and Australia), Chinese officials estimate the economy will need over 2.1 billion tonnes of coal in 2005, 200 million more than in 2004.
The Chinese Academy of Social sciences reports that coal accounts for 67% of China’s energy consumption. Coal-fired power plants account for 60% of China’s total coal consumption. Critics and observers note that China’s massive consumption of coal contributes to air pollution in China’s largest cities. China has actively invested in new nuclear power plants.
But with global oil prices nearing the $50 plateau once again, the biggest limit on Chinese economic growth may now be access to affordable energy.
Category: Economics