China looks to the barbarous relicBy: Stewart Bailey
Posted: 2004/02/17 Tue 18:46 | © Mineweb 1997-2004
CAPE TOWN (Mineweb.com) -- Chinese metal demand provided the good news narrative for this year’s Mining Indaba in Cape Town, in the absence of any other major breaking-news story. The almost-exclusive bullishness provided miners and bankers with just the optimism they needed to market a range of mining growth stories in Africa, a continent that until recently was largely too risky to attract more than scant interest from traditional debt financiers.
Friedland believes the Chinese will be keen to invest in mining projects in Africa, as part of a wider plan to secure off-take certainty for strategic metals and minerals. Canadians, he says, will be the chosen operators on the continent.
“China sees nothing but friends in Africa. I am comfortable that Candians will keep coming to Africa and the Chinese will fund that,” says Friedland.
The question on everyone’s lips, however, is whether the unprecedented boom in Chinese demand for metals across the board, could be sustained. Most believed it could, although none quite as fervently as Friedland, a self-appointed oracle in all matters relating to China and metal markets.
His bullishness is hardly surprising, though, given that he has staked his reputation on a continued boom on the continent, which plays host to his much-vaunted Oyu Tolgoi copper-gold project. The same continent will also be the primary consumer of the production from the mine.
“It is ludicrous to think this is a bubble. The leadership of China is arguably smarter than the current leadership of the United States,” Friedland enthuses. Already, he says, the Chinese leadership has cooled industrial demand to mind-boggling 15%, a level deemed more sustainable in the longer term.
Friedland, arguably the industry’s finest raconteur, believes China will be the cause of a ‘perfect storm’ for metal prices. Consider this: last year, China showed a staggering 31% growth in motorcycle demand, that from a base of 41-m motorcycles; air conditioner sales were up 57%; car manufacturing volumes grew 84% to 2,1-m vehicles, a figure Friedland believes could be repeated over and over again as China heads toward the slot as the world’s largest car manufacturer by 2025.
“They will be making 15-m cars a year shortly,” says Friedland.
The statistics are endless – iron-ore imports doubled between 1999 and 2002 and continue to march strongly upward; the country consumes 25% of the world’s platinum, demand for personal computers has soared by some 95% and more than 80% of the world’s foreign direct investment outside of the US, has found its way into China in the past year.
At the heart of the growth spurt, says Friedland, is the country’s 1,3-bn consumer base. Of that number, says CIBC mining analyst Jack Jones, more than 300-m are under the age of 20 and have yet to hit the economic mainstream – that is more than the total US population. Jones, who is a regular visitor to China, says the new entrants to the economy have little affinity for communism.
“Communism is vanishing. The new regime is capitalism,” says Jones.
The explosion in manufacturing in China has placed increasing levels of wealth in the hands of the ordinary Chinese. And while those consumers become increasingly affluent, they also stand to benefit from falling prices. Friedland predicts a deflationary boom for China, similar to the one helped Australia earn its ‘lucky country’ moniker at the turn of the last century. That trend will only gain momentum, he says, as the 90% rural component of China’s population makes for the cities. Steel production, a solid barometer of domestic growth, bears him out. Although China produces more steel than the US and Japan combined, it remains a net importer of steel to feed its own growth needs. That trend looks set to continue, given that iron ore prices climbed by 18% this year.
With those fundamentals in mind, Friedland says the implications of increased consumerism and urbanisation in China, suggest its demand curve still has some way to climb.
“Mr Wong is tired of cooking her tofu in an aluminium pan, she wants stainless steel,” he says.
If Friedland is right, the implications for a resurgent nickel price are profound. Copper, too, could be the beneficiary of the overall strength of industrial demand, given its prolific use in manufacturing. Friedland predicts large-scale panic on the London Metal Exchange when traders and consumers realise that the Chinese growth trajectory is unlikely to flatten, much less drop off.
“There is going to be some hoarding soon,” he says. “The equilibrium price for copper must be above $1,20/pound.”
But it is not only industrial commodities that stand to benefit from the boom. Friedland reckons the Chinese leadership is all to aware of growing US economic and political risk and are increasingly eager to diversify some of the country’s $400-bn in dollar reserves.
“We are living in a world where you could bring a nuclear device up the Hudson, would you want to hold those dollars,” says Friedland. “They are interested in the barbarous relic…gold. I have been talking to some of the senior Chinese leadership and I can assure you it is true.”