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Recently I talked to a businessman of East Indian descent in Lisbon about the economic prospects for India and China in the fast-changing hierarchy of global economies. He felt China had at least one major advantage over the world's largest democracy, namely the fact that it wasn't a democracy.
There are few impediments to implementing infrastructure projects in China including roads and power plants - unlike in the Western World where public consultation, special interest groups and permitting procedures can drag out construction projects for years if not decades.
Most economists agree that China will continue to dominate in manufacturing for many years to come; and the shear size of its domestic market lends itself to increased internal consumption of consumer projects, an obvious boon to the nation’s manufacturing sector during this unprecedented period in economic history.
Following the global economic downturn, the Chinese government embarked upon a $586 billion stimulus plan that includes rail and road projects. These and other projects caused the Chinese economy to expand by 8.9% in the third quarter, almost three times that of the United States whose growth rate for the period might well prove to be a statistical anomaly.
In the past, China’s government has spurred economic growth by subsidizing the purchase of various consumer products including designated brands of color TV sets, refrigerators and mobile phones, all of which use industrial metals.
Taking the subsidy game to an even higher (and more expensive) level, the U.S. government spent $3 billion on a “Cash for Clunkers” program that provided car buyers with a voucher worth up to $4,500 toward the purchase of a new, more fuel-efficient vehicle. One can only wonder if Chinese scrap metal buyers weren’t laughing all the way to the bank with the sudden appearance of all this good quality scrap on the market.
In any event, one can hardly imagine the carnage that we would be seeing in the market for industrial metals without the level of Chinese demand that we are receiving today. Clearly, the surge in Chinese imports during 2009 has been driving commodity markets, offsetting the fall in demand from other regions including the United States and Europe.
By Western standards the scale of China’s infrastructure projects is almost unimaginable. In about three year’s time, it is estimated that China will have more miles of multi-lane highways than the United States. In addition, unprecedented growth in new loans is spurring internal demand for Chinese-manufactured products, contributing to the nation’s economic rebound, not to mention demand for services that Westerners take for granted.
In the recent past, the Chinese government has expended huge amounts of money on port cities to facilitate export demand but that policy is changing given the potential social consequences of disenfranchising a large part of its rural population. Today, inland Chinese provinces are becoming the focus of infrastructure spending, boosting the purchasing capacity of the largest segment of its estimated 1.3 billion population.
Back in the 1980s, I talked with the president of a major mining company which also happened to be a significant copper producer. He was decidedly bullish about the future for the red metal. And in order to demonstrate the purchasing power of the Chinese consumer, he suggested that if every Chinese family had suddenly decided to buy a toaster, the price of copper would probably double.
While that may or may not have been the case, his point was well taken. It also proved to be prescient in the context of future Chinese demand for the entire spectrum of industrial metals even though his price expectation played out more than a decade later than he anticipated. Not that I can blame him, being a part of the minerals industry for more years than I’d care to count and having my livelihood dependent on metal prices.
According to the World Bank, “The longevity of the current boom and the wide range of commodities that have been affected have prompted many observers to wonder if the global economy is moving into a new era characterized by relative shortage and permanently higher (and even permanently rising) commodity prices.
The World Bank has an interesting take on the future of commodity prices, citing the prospects for a slowing in population growthover the next two decades “which should help moderate commodity demand compared with past demand.”
Just how deeply it looked into the ability of commodity producers to maintain output at present levels is debatable. Declining output in the face of even moderate demand increase is a recipe for escalating prices in my opinion. Put me in the camp that believes (with the exception of a few hiccups along the way) that the bullish trend for commodities won’t end any time soon.
Neil Brewster of Rio Tinto Economics hits the nail (a galvanized steel one at that) squarely on the head when he says that “Future metals consumption trends will be driven by growth in population and wealth in developing nations, particularly China and India.” You can take that to the bank.
David Duval
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David is a recognized authority on the Canadian diamond industry, having co-authored a book on the subject in 1996 called “New Frontiers in Diamonds.” He also holds board directorships and is a contributing Editor to Resource World, a Vancouver-based mining magazine with an international subscriber base.
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