Australian farmers used to joke about China’s potential appetite for wool. The story they liked best was one where everyone in China started wearing wool socks, effectively consuming a troublesome stockpile. That was, of course, a dream. Metals today are living the dream because there really are 1.3 billion people in China consuming metals at a ferocious rate, eating stockpiles and driving up prices.
Iron ore, alumina, coal, copper, manganese, natural gas, rare earths and even gold and platinum are on the Chinese shopping list as the economy expands at a phenomenal 8-10% a year – a rate which doubles the size of the country every 6-7 years. To visit Shanghai or Beijing is to see the world as a giant construction site.
China is expanding at such a remarkable rate that some outsiders query whether it can continue, or whether official Chinese statistics are accurate. Both of those points have some validity. No boom goes on forever, and the statistics of a one-party communist state are notoriously inaccurate – or even deliberately false.
But even after allowing for the negative potential of an economic bubble bursting, which looked likely at the height of the SARS (sudden acute respiratory syndrome) outbreak, or of the government fudging the figures, there is enough evidence in the crowded streets and on the crane-filled horizon to ask two other questions – can Australia actually cope with the appetites of a rampant China, and who will emerge the winners from doing business with China?
The winners will emerge in stages and first cabs off the rank will be the major miners, companies the size of Rio Tinto, BHP Billiton, WMC and Alumina. They have the all-important credentials of size and authority which the Chinese demand when dealing with foreigners, especially when it is remembered that all Chinese companies were once government agencies and the new-found ability to trade overseas is being treated with caution lest Beijing object. Second-tier miners will wait in line until the big boys have been fed.
This category will be dominated by companies selling raw materials which feed China’s domestic demand and its export-oriented manufacturing sector. Any companies, other than those providing highly-specialised goods and services (such as mine-management software and engineering consulting), will struggle to compete against low-cost Chinese labour and tightly-controlled Chinese purchasing habits – an area closely watched by government authorities in Beijing.
Most equipment and service suppliers will do far better to ride on the coat tails of the big Australian-based miners rather than trying to crack the Chinese market on their own. Examples are to be found in the way in which Rio Tinto’s iron ore division is booming thanks to its sharply rising sales to China, or in the anticipated entry of Anglo American into the Australian iron ore industry via a deal with Kumba Resources and Gina Rinehart on the Hope Downs development.
At Rio Tinto, there is a rush underway to lift iron ore exports from this year’s 74 million to 85 million tonnes in 2004, and then up to 114Mt. Growth of this magnitude is proving to be a bonanza for Australian suppliers servicing Rio Tinto. It’s the same at BHP Billiton where the new Area C mine is scheduled to be opened on October 30 as part of a rush to get to the 100Mt per annum mark.
Right across the iron ore industry there is a boom underway. Tiny Mt Gibson and Mid-West are hurrying to launch their small west coast mines. Lynas Corporation is buying the 40% interest in the Channar mine owned by Chinese interests. Portman is desperately trying to boost its Koolyanobbing mines.
The demand for steel in China, which is being driven by the pre-Olympics building boom in Beijing but which has spread countrywide, explains why Laiwu Steel Group has signed-up for a HIsmelt plant using Rio Tinto’s still evolving technology. Laiwu plans to replicate an 800,000tpa plant at Laiwu City in Shandong province even before Rio Tinto finishes a plant of the same size at Kwinana, south of Perth. The Laiwu investment, through more cautious western eyes, is what Sir Humphrey Appleby (of the Yes, Minister television series) would have called “courageous”. The Chinese company has agreed to buy a technology which has been 20 years in the research-and-development phase and which still requires the Kwinana plant to prove that it works on a commercial scale.
Such is the hunger among Chinese companies to find a competitive edge over rivals that Laiwu will spend about $US400 million installing the very clever, but commercially unproven HIsmelt process.
“It’s not just iron ore that’s booming away in China,” said retiring Rio Tinto chairman, Sir Robert Wilson. “The consumption of copper and aluminium during the first part of this year rose by 20% in China. This very fast growth we’ve seen in the past few years in China is continuing unabated.”
“Supplying iron ore to China will mean more than just an economic boost for Western Australia,” said state premier, Geoff Gallop. “Increased iron ore exports as seen as crucial to providing a buffer against potential downturns in the Japanese steel industry on which WA has traditionally relied on for its iron ore exports.”
Gallop’s comparison between China and Japan is important. It highlights a “changing of the guard” in the relationship between Australia and its important Asian trading partners. Japan is still the leading recipient of Australian metals and minerals exports – just. In 2001, as China prepared to join the international trading club, the World Trade Organisation, exports from Australia grew by an extraordinary 39.2%. Last year, they grew by a further 40%.
The boom in iron ore exports is one example. Chinese copper demand is another, as is demand for natural gas as shown in Woodside Petroleum’s $25 billion contract to sell liquefied natural gas (LNG) to China over a 20-year period. The Woodside deal is easily the biggest individual contract by an Australian company with China. It is so big that it can hide a series of other equally profitable deals. WMC has put its stamp on China (or is it China that has put its stamp on WMC?) by signing a $1 billion sales agreement for the supply of 90,000t of nickel-in-matte over the five years from 2005 to 2010 to the Chinese company, Jinchuan Group. The significance of the WMC deal is that it means China will replace Japan as Australia’s biggest nickel export destination. At the time of the deal being announced in August, WMC spokesman, Troy Hey, said the Jinchuan deal would start when an existing deal with Japan’s Sumitomo Corp expired. Continues Click Here.
