China Resources Boom Only Just Beginning

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You could be forgiven for taking China’s boom for granted. The only subjects to have gotten more press in the last year are global warming and David Hicks. All the attention on China may have caused a little complacency, though. Perhaps we have actually underestimated the magnitude and duration of China’s industrialization.

“China’s energy demand will rise about 4 percent every year to the equivalent of 2.7 billion tons of standard coal by 2010, the government forecast on April 10,” Bloomberg reports today. “The nation gets 78 percent of its electricity from coal, prompting companies including China Coal to expand production as prices increase. Domestic coal contract prices increased by as much as 10 percent, or an average of 20 to 30 yuan a ton in 2007.

Output will be little changed at 80 million metric tons of coal this year and increase 50 percent to 120 million tons in 2010.”

Gee that’s a lot of coal. You can imagine that in addition to increasing its own production, China will also continue to be a buyer of Australian thermal and coking coal. You can also expect more anxiety over what all that coal (and carbon) means to the planet. But what kind of cycle are we dealing with here?

Is China’s growth contingent on U.S. consumption? If so, then China’s growth cycles will be highly correlated to U.S. demand and U.S. interest rates. The two economies will remain linked, and China’s voracious consumption of Australian resources is merely a function of America’s voracious consumption of manufactured Chinese goods, which in turn is merely a function of America’s record-low saving and record-high debt levels and record-stupid monetary policy. Can global growth really rely on the stupidity of America’s central bankers?

No one ever looked foolish underestimanting the idiocy of central bankers, but…

There is another explanation that suggests China’s resource-intensive boom, though linked inextricably with American consumption, is also part of a larger, longer, and more powerful economic cycle, maybe the last big resource-intensive cycle of its kind in the history of this planet (good thing we’ve already got another planet queued up for development.)

In other words, according to this second, mega-historical explanation, China’s boom is not just a very large symptom of the global credit boom, but the emergence of a large feudal, agrarian economy into a large industrial economy. It is like Team America’s emergence onto the global economic stage, but multiplied times ten.

If that’s the case, it means China’s growth is really just beginning. Ditto for India. And it means the bull market in resources may last much much longer than any of us expected. Indeed, the only real limit is that there may not be enough oil in the world to produce refined fuels for the 140 million cars analysts predict could hit Chinese roads  in the next twenty years (perhaps this is why China is trying to produce transportation fuel from
coal.)

Come to think of it, is there enough water to grow the crops to feed the animals to supply the protein a hungry world needs? Is there enough copper in Chile or iron or in the Pillbara to turn China’s eastern seaboard into one giant home for 500 million people? How many air conditioners will it take to keep the place cool? How many lights will have to turned on so you can see in a place where smoke from coal-burning fire plants blots out the sun? Will Africa become a giant raw-materials colony for China? Or is not just Africa but Canada, Australia…and anyone else who has in abundance what China needs to geep growing?

Of course, these kinds of massive projections are also exactly the kind of garbage people say to convince themselves to buy stocks at the top. Resource markets are always cyclical. And there’s no reason to believe this one will be any different. Still, we are nearly convinced that we may have seirously underestimated the duration, intensity, and historical significance of this cycle.

How? Well, strong Chinese demand has not been self-correcting. Rising resource prices have not yet swamped the market with new producers of raw materials. It takes a lot of money and expertise and labour to produce more iron ore, coal, or gold. While the money is abundant these days, labour and expertise are not, especially in places like Western Australia and Queensland, where the resources happen to be located.

This means that prices can stay higher for longer than in past cycles. Again, we cringe at arguing with the evidence of the past that cycles always turn. But we are merely exploring the prospect that this migration of wealth from West to East may be far more massive than we were thinking. It’s not just a matter of a few people shifting portfolio allocations to have exposure to Eastern markets. It’s a shift in the economic center of gravity of the global economy, and it leaves Australia in an immensely enviable position.

Dan Denning
The Daily Reckoning Australia

How much further can China’s resources boom go? Leave a comment below.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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6 Comments on "China Resources Boom Only Just Beginning"

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Stephen
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How much easier is it to play monopoly, when someone else is rolling the dice; Indeed, ‘It Ain’t No Fun, When The Rabbit Got the Gun.’

Bob
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A very Interesting, well written article. To add fuel to your thoughts, consider that China has an internal socialist economy but is externally capitalistic. Thier internal economy is also growing very rapidly and does not seem to be constrained by market forces in the same way that an internal capitalistic economy would be.
Hmmmm…

Bob

David
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Dan,

Great article. I was a subscriber of Strategic Investments for years while you were the editor and once your successor took over recommending selling many of your picks, I cancelled my subscription. Are you publishing a paid subcription newsletter any longer? I would be interested even though I am in the states.

C. Lawrence Perkins
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There is an “economic day” that follows the celestial day around the globe. The “economic day” takes much longer, of course… centuries… but it has moved from the Cradle of Civilisation in the Middle East, through the Mediterranean, into Europe, across the Atlantic to North and South America, then across the Pacific to Japan, Korea, and now… China, India and the antipodes, Australia and New Zealand. The 21st Century will belong to China and Australia/New Zealand, with India close behind. The Chinese are simply doing what they’ve always done best throughout their history: being consummate mercantilists. The 50-year experiment with… Read more »
balaji
Guest

when we consider the growth of different economies and the cycle of resources i think it is of great importance to consider where we are in peak oil!!!!!!!!!!!!

oil will be the final and deciding factor of this cycle of expansion.

hegartyj
Guest

Does this mean Austarlians will be going to China as the Chinese came to Australia during the gold rush

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