Keep up with the new order, China's on speed
By John Garnaut | theage.com.au | 13 March
Each month the number of new houses being built in the US drops to a new low and the world copper price takes a little hit.
That is because global hedge fund managers are programmed to know that every new US home eats up about 200 kilograms of copper wire, copper pipes and copper fittings, and each new home owner buys about 10 kilograms of copper embedded in their home appliances.
Why then, with the US suffering "about the worst housing market in a century", according to the home lender Freddie Mac, has the price of copper more than quadrupled in five years to hit a new record high this month?
The answer seems to be that a surprisingly high number of daily traders in the hedge fund world are playing yesterday's game.
US copper consumption has fallen 8 per cent a year for five years and now accounts for just 12 per cent of the world market, says the mining consultant Urandaline Investments.
For all its considerable economic and financial woe, the US makes a minor contribution to changes in global demand for most commodities, other than oil.
China, on the other hand, already accounts for 27 per cent of world copper demand, and it has clocked up 13 per cent annual demand growth for five years. China buys 60 per cent of all new global production.
A better leading indicator for copper is China's fixed asset investment, which is growing at 24 per cent a year.
This figure encompasses the greatest housing boom in history, with apartment blocks going up to house 1.5 million new urban migrants every month. It also includes the world's greatest road and railway construction boom.
In January, for example, the Mayor of Shanghai, Han Zheng, warned his city's commuters to brace for "tough times" because his municipal workers would obstruct more than 1000 roads as they dug away at a subway network that will end up one quarter larger than the London Underground.
Han plans to build 116 subway stations this year - compared with Australia's grand total of seven - as he lays 276 kilometres of new underground railways by 2012. Beijing says its subway network is going to be bigger still. And 35 other large Chinese cities have plans or have asked permission to extend their subway networks or build them from scratch. That is a lot of copper, nickel and, above all, steel. But China's construction industry accounts for only a quarter of the country's hunger for copper. New power generators and transmission lines consume double that share. China built more electricity generating capacity in the past five years than it did in the previous 50. But that was not enough to keep up with the country's electricity demand. Similar stories can be told for tin, which rose $US850 a tonne on Friday to a new record. And oil, which hit $US111 a barrel at the weekend, and lead, iron ore, coal, uranium, wheat and almost every other commodity with which Australia happens to be overly endowed.
Some of this year's extraordinary run in commodities prices is no doubt exaggerated by a weak US dollar and world investors rushing to park their money in anything but equities. But no amount of speculation can explain recent price gains for Australia's two biggest export earners, coal and iron ore, which are set by real shipment prices rather than tradable futures contracts.
The Reserve Bank governor, Glenn Stevens, spelt out the macro point in an internal seminar to Treasury last week. The Chinese industrial revolution that is already pushing the Australian economy to its limits is only in its infancy.
"It is important to keep some perspective about the situation in which we find ourselves," Stevens said. "We have been living through one of the largest transformations in the structure of the global economy, as far as Australia is concerned, for a century. The rise in the terms of trade over the past five years is the biggest such event since the Korean War boom in the early 1950s.
"But while the Korean War event was a temporary one, all the indications are that the rise of China is not just a cyclical event, but a structural change of the first order. China certainly has a business cycle, like all other economies, and will slow at some point.
"Even so, it is highly likely that, short of some catastrophic event, China has many years of strong growth still ahead. It will not be at the 11 per cent per annum pace of the past couple of years, and there will be periods of weakness and instability. But the rise of China is not a flash in the pan of economic history.
"[It is this] relative price change that is more important to Australia, in particular, than to almost any other country."
Stevens's brief was to give "a Reserve Bank perspective on the economy", and yet he did not mention the global financial crisis, the probable US recession or the fading Japanese and European economies. All of those things, of course, matter greatly for the world and for the global economy. But they matter less to Australia than any other Western country.
Needless to say, from a central banker's perspective, the greatest improvement in Australia's trade prices in a century "is, overall, very expansionary". And that will not change until the world's mining companies finally speed up their production to catch a Chinese market that had run away from them.
First published by TheAge.com.au on March 13 2008
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