The Hindu Business Line : China's appetite for commodities far from satiated

CHINA's growth story is far from over; and every Doubting Thomas can review his stand on the Asian major, according to experts who participated at the recently concluded China Commodities Conference organised by Macquarie Research at Shanghai and Beijing.

Looking at general economic outlook through the health of the banking, transport and logistics, auto and construction sectors, and, of course, individual commodities, experts concluded with great confidence that high levels of demand growth (around 10 per cent or more growth for commodities this year) were indeed sustainable.

Over the past five years, some of the major drivers of demand boom have been urbanisation, infrastructure development and rising incomes. According to an expert, who took part in the meet, an extra 120 million people would have moved to urban areas by 2010 (or, in some cases, urban areas will have moved to them!!) and an additional 430 million people by 2020.

It is forecast that the number of urban dwellers would reach 648 million by 2010 and 970 million by 2020 (compared with 460 million in 2000). By 2020, the Chinese population could be 65-70 per cent urban.

Improvements in the quality of human capital (through education) and the shifting of workers from agriculture to services and industry (and the resulting increasing economic return to labour) are seen as key drivers of growth. Demographics are seen actually a positive for the Chinese economy, with age 15-19 the biggest age group, and the problem of an ageing workforce would not arise for about 20 years.

The consensus view of economists who presented papers at the conference was that Chinese GDP growth would slow next year, with fixed capital formation having to shrink (from current very high levels of as much as 44 per cent of GDP), and the growth in the trade surplus (an increasingly important part of the growth in GDP this year) likely to also slow.

However, GDP growth is still expected to be around 8.5-9 per cent next year, and there appear to be few concerns about downside risks to these forecasts.

The most obvious sources of potential downside risk are a serious downturn in the US economy or the possibility of health scare. In the absence of these two factors, the growth outlook is seen as very robust.

According to China experts, there still are concerns about the state of the banking sector doubts about corporate governance, the scale of non-performing assets, party interference in lending decisions, and the difficulty of rolling out reforms into various regions of China.

However, the general feeling is that with the economy growing strongly and performing loans growing faster than non-performing ones, the financial sector is unlikely to be the trigger of any crisis in the foreseeable future.

While the world knows power shortages have posed a problem in many parts of China in recent years, what is less known is the fact that the power shortages are beginning to ease or becoming less severe. Chinese power consultants have predicted that the power market would move into oversupply in 2007.

Commodities: China's role in being the mover and shaker of the global commodities market is well known.

A strong production base for various commodities and continuing large imports combine to satisfy the huge appetite for consumption of commodities, both agricultural and non-agricultural.

Steel market in China is clearly oversupplied with stockists reported to be holding large inventories of long and lower-quality flat-rolled products.

Given the quality difference between the vast bulk of Chinese flat products and those produced elsewhere in the region, views can vary on how much of the oversupply will knock-on into Asia.

Offers by Chinese producers are already beginning to exert downward pressure on the market.

On iron ore, Chinese representatives are pushing for no increase in prices in 2006. Inventories of iron ore at ports are believed to have been stable for much of this year, at around 30 million tonnes (mt), a level witnessed two years ago, before stocks rose to 45 mt in 2004, only to revert to the previous position after a drawdown.

However, there is belief that with monthly imports having grown over the period, 30 mt represents a low stock/import or stock/consumption ratio. There are also concerns about the quality of the stocks.

While on iron ore, discussion relating to the freight market indicated a clear easing of the market due to supply and not demand. The continuing strong growth in sea-borne iron ore trade means that demand for bulk shipping remains strong.

However, the supply of vessels is also growing strongly. Experts estimated a 6 per cent year-on-year growth in the fleet and the order book for new vessels was 75 per cent above its previous record.

This should lead to a fall in freight rates next year.

Squeezed by very high spot alumina cost, a large number of Chinese aluminium smelters (75-80 per cent) are making losses. The threat of closure of some units appears real.

However, China will remain a net exporter of aluminium over the next few years; but balanced from 2009.

Because of the margin squeeze, aluminium production growth is expected to slow, and focus of investment is the aluminium sector is now shifting upstream to bauxite and alumina.

Over a dozen alumina projects are reportedly under construction, although there is a question mark over Government approval.

Nickel demand continues to be driven by China's stainless steel consumption growth (approximately 20 per cent in 2005, that is from 4.5 m.t to 5.5 mt. Yet, at 3.5 kg, the per capita consumption of stainless steel in China is way below the 8 kg/head in the Western world.

On prospects of Chinese growth, world stainless steel market is forecast to grow by 8.5 mt between 2005 and 2010. China will account for as much as 6 mt of this growth.

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