The Impact Of China On Metals Markets
(Lawrence Roulston’s market commentary from Kitco)
China has had an enormous impact on commodities markets over the past couple of years. Will China be able to maintain the incredible level of growth that has pushed metal prices to record levels? If economic growth falters in other parts of the world, how will that impact on the outlook for China?
These are critical questions for resource investors. This article offers statistics and some insights from my eighth visit to that nation in transition. It is clear to me, and to anybody who has looked closely at the situation in China, that the bull market in metals is still intact, and likely to grow stronger.
Let’s start with the situation outside of China. Many investors are concerned that the massive government deficit in the United States is adding to an unsustainable level of debt at the same time that consumers continue to rack up a mountain of debt.
Of course, the level of debt in the U.S. is not sustainable. And, it is not being sustained. The dollar has fallen roughly 30% against the euro and it has plunged even further in value when measured against hard assets such as gold. That continual slide in the value of the dollar acts as a safety valve, letting the pressure off gradually.
In essence, an economy with an excessive level of debt is being steadily downgraded by the rest of the world. There is no need for a cataclysmic adjustment. The imbalance is being steadily rectified as Americans give up an ever larger share of their wealth to the rest of the world through the erosion of their currency. Many Americans will be shocked when they discover how much of their wealth they have already lost.
As the American economy is becoming progressively less dominant in the world context, it is likely to grow less quickly. Some commentators are still suggesting that a slowdown in the U. S. economy will reduce demand for merchandise produced in Asia to an extent that it will impact commodity prices.
Their argument is that growth in the Asian economies is a result of those nations producing goods for export to the United States.
Even a moment's reflection will make it clear how naive it is to believe that Asia is merely making stuff for the U.S. Consider how total demand for metals has grown at a pace that has pushed the mining industry beyond its limits. Demand for copper, for example, is so strong that the copper price is six times higher than the level of five years ago; and similarly across the board for base metals.
It is hard to comprehend how anybody could fail to see that such strong growth in demand is anything but the result of an entirely new consuming economy. I estimate that if a person spent even one day in China it would be enough to convince even the strongest cynic that metals are being consumed in that country at a fast pace; in fact at a pace that is entirely incomprehensible to most investors in the West.
I am presently returning from a trip that took me through four big Chinese cities plus Hong Kong. Some observations from that trip, in a sidebar article, should help provide further insights into the economic growth of Asia.
The numbers provide a hint of what is happening. Many people have heard the figure of 30 million people a year moving to the cities. Migration at that level is expected to continue for another 10 years, during which time about a third of the rural population will move to the cities, a proportion similar to many developing nations.
People who have spent time in Latin America or Africa have seen the shantytowns that extend for kilometers around many of the big cities. Put that the vision completely out of your mind. China is creating urban housing for 30 million people a year by building high-quality concrete high-rise apartments and condominiums.
That is not to say that a farmer is given a new condo on arriving in the city. Those high-end condos are being purchased by the well-to-do business owners, executives and professionals that constitute a rapidly growing middle class in every Chinese city. Condo prices vary from city to city, but are generally in line with big-city prices in North America.
The homeowners pay cash or they get mortgages, just like in the West. People across the economic spectrum are trading up, and that opens up housing units at the lower end of the markets for the new arrivals.
The condominiums are being developed by private developers, exactly as they are in the West. Many of the developments involve hundreds of units in each of a number of phases.
People are moving to the cities to work in factories as well as the range of services and support jobs found in any big city. The urban development goes well beyond building housing for 30 million people a year. A proportionate number of factories, schools, hospitals, roads, airports, train stations, buses, restaurants, bars and all the other amenities of any city, anywhere in the world, are being constructed.
To put that level of new construction into perspective: It is like building six cities the size of Toronto or a New York plus a Los Angeles, from the ground up, each and every year. The urban growth of China is being spread across 100 cities that already have more than a million people, as well as an even larger number of smaller cities.
That massive development program in China is extraordinarily well organized. It has been planned and carefully thought out. The result is that things work. In fact, they work better than in many Western cities which have sprawled in all directions with no sense of planning.
China is by far the largest consumer of concrete and metals in the world, and it is still early in the first wave. Each year sees the basic infrastructure for another 30 million people constructed. In addition, that ever growing urban population are acquiring consumer goods.
Already there are roughly 300 million middle-class people in China – people with the same level of wealth and buying power as middle class people in the West. Beyond the basic needs of urban living, the growing middle class are buying all the trappings of middle-class life: luxury cars, designer furniture, plasma TVs, jewelry, holiday homes and all the other essentials that we in the West accumulate over our lifetimes.
The fast-paced growth extends well beyond China, to encompass most of Asia. Already this year, I have been in three other Asian nations. China is definitely the standout, but growth is evident throughout a region that is home to 3 billion people.
Remember how the modernization of Japan boosted demand for commodities for a couple of decades. The present modernization in Asia involves more than 20 times as many people.
The size of the Chinese economy has already exceeded that of Great Britain. The government is hard-pressed to keep the growth rate under 10%. And remember, each year’s growth is building on a larger base.
Chinese investors now have $1.9 trillion dollars of savings. Investor wealth is mounting quickly, with the two major Chinese stock exchanges both up more than 60% in the last year. Adding a level of stability is China’s official foreign currency reserves, which have now surpassed Japan’s to become the world’s largest.
Until you see it, it is hard to really comprehend the pace and the magnitude of what is happening in Asia. A couple of the people I traveled with on the latest trip were seeing China for the first time. They had seen the statistics and read numerous accounts of China. Nevertheless, they were totally blown away when they saw it for real.
People who continue to think of China in terms of a pool of cheap labor making stuff for other countries will miss out on the greatest investment opportunity the world has ever seen.
Those who see China first-hand quickly comprehend that the country is going through a transformation into the modern world and that process is absolutely unstoppable.
