China's Quest for Resources: Iron Rations

CHINA'S QUEST FOR RESOURCES

Iron rations

Mar 13th 2008
From The Economist print edition

China is determined to make the most of its own limited resources

TO SEE just how quickly China's demand for natural resources is growing, visit Shougang Group, on the outskirts of Beijing. The story of the mill mirrors the chequered history of Chinese industry. This is one of the country's oldest firms, founded in 1919. Nationalised after the Communist takeover in 1949, it was turned into a showcase for the achievements of the People's Republic. Pictures of assorted party bigwigs donning hard hats and greeting the workers adorn the walls. During the Great Leap Forward, Zhou Enlai visited the mill to celebrate its bounding output; in the 1980s, Deng Xiaoping came as part of his drive for “socialism with Chinese characteristics”, meaning capitalism with a dose of state ownership.

In keeping with Deng's reforms, Shougang has transformed itself from a model of central planning into a cold-blooded capitalist roader. In the old days the mill was a city within a city, complete with all the frills you would expect from a workers' paradise. It still has its own newspaper and television station, and an internal bus service to ferry workers around its eight-square-kilometre compound. But the company has already shed 180,000 workers and plans to trim 60,000 more, leaving just 20,000. It has offered shares in five subsidiaries to investors on the stockmarkets in Shenzhen and Hong Kong and spent the proceeds on bigger and better facilities. Its steel has been used in many of China's best-known construction projects, including the Three Gorges dam, Beijing's curious egg-shaped opera house and a soaring suspension bridge that spans the Huangpu river in Shanghai.


At the furnaces in the centre of the compound, sparks shower down as a mechanical shovel fills a red-hot crucible with coal and iron ore; molten steel pours from another. A temperature gauge reads 1,127°C. Last year the mill turned out 8m tonnes of steel. But later this year it will close, a casualty of the drive to improve Beijing's air quality for the Olympics.

The demise of Shougang Steel's main plant, however, will not dent the firm's output for long. In conjunction with another Chinese steel firm, it is on the verge of opening an even bigger mill, on an artificial island in the Bohai Gulf in Hebei province, about 220km (140 miles) to the south-east. This will have an initial capacity of almost 10m tonnes. What with the expansion of two other mills in Hebei, Shougang is on course to increase its output from 6m tonnes in 2003 to at least 20m tonnes by 2010. A spokesman says further development is already in the works, and output might reach as much as 30m tonnes soon after. Asked whether the firm is confident that there will be a market for all this steel, he looks puzzled. China is growing so fast, he says, that there is no problem selling anything Shougang produces.

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Heigh-ho, heigh-ho, it's off to do our bit for China's economy we goThere are many more businesses making similar assumptions. Shougang ranked only ninth by output among China's steelmakers in 2006. In all, the country has 7,000 of them, twice the number in 2002. Steel production rose by 15% last year, much the same rate of growth as in 2006. Since 2000, China has roughly tripled its output, making it by far the world's biggest producer, with 37% of global output. It accounted for about three-quarters of the global growth in steel production between 2000 and 2005.

China's domestic production of iron ore has more than doubled since 2003, again making the country the world's largest producer. But that has not been nearly enough to supply its proliferating steel mills. So imports have been growing by leaps and bounds too, from 148m tonnes in 2003 to 375m tonnes last year. They now account for half the world's seaborne trade in iron ore. Citigroup, an investment bank, estimates that they will rise to almost 900m tonnes by 2014. And over the past few years it and other banks have had to revise such estimates upwards several times, as demand has consistently exceeded expectations.

Shougang, for example, owns a mine in Hebei, conveniently close to its mills. But that does not provide enough ore for all of them, and other domestic supplies are scarce, so the firm has had to look overseas to make up the shortfall. It bought a mine in Peru in the 1990s and a stake in an Australian one in 2006. In addition to imports from both of those, it also buys ore on the international market. Its new mill is being built on the coast partly to provide easier access for such imports.

Much the same story could be told about many other commodities. Name almost any mineral, and mining firms and investment banks can produce charts depicting how Chinese demand has doubled or tripled since the beginning of this decade. Last year China's copper imports surged by 80%.

China is also importing ever more food. This is partly because more and more farmland is being given over to industry and partly because the population is growing. Moreover, as China becomes richer, its citizens are eating more meat, which contributes to rising food imports: producing meat for people to eat takes more grain than feeding people on cereals.

Squeeze every drop
The commodity that best illustrates China's abrupt transition from exporter to importer of resources is oil. In the 1950s Mao Zedong directed his mandarins to find oil to cut China's import bill and reduce the risk of a blockade by hostile capitalists. And find it they did, in the middle of the bare steppe of the north-east, at a place called Daqing. The field turned out to be one of the world's biggest, with over 14 billion barrels of reserves.

This success made Daqing a byword for industrial zeal and heroic self-sacrifice in the name of the revolution. “In industry,” ran one of Mao's most frequently invoked dictums, “learn from Daqing.” Propagandists built up Wang Jinxi, one of the drilling foremen in the field's early days, into a model worker who did not hesitate to risk his life for the good of the people. Chinese schoolchildren are still told how the Iron Man, as Wang is known, flung himself into a bubbling pool of oil and wet cement and mixed it to the right consistency with his own body to cap a well. He survived, just.

The centrepiece of the modern city of Daqing is the Iron Man museum. An imposing statue of the man himself, sleeves rolled up and chest thrust bravely forward, stands in the middle of a small park opposite, impervious to the icy wind blowing from Siberia. But nowadays Daqing is no longer living testimony to China's indomitable spirit of self-reliance. Rather, it is a symbol of the inadequacy of China's domestic resources in the face of the economy's growing thirst for oil.

Oil production from Daqing peaked at about 1.1m barrels per day (b/d) in 1997. By last year it had fallen to 830,000 b/d, and it is now declining at a rate of about 4% a year. That is better than geologists had expected a few years ago, but slowing the rate of decline has required efforts worthy of the Iron Man. The field is no longer under sufficient pressure for the oil to flow naturally, so Daqing Oil, the subsidiary of PetroChina that runs it, must keep injecting water beneath it to push the oil out of the wells. According to Feng Zhiqiang, the firm's managing director, both injection and extraction wells must be drilled with a margin of error of no more than 50cm to drain every last nook and cranny of the reservoir. The firm also injects special polymers into the field that help free droplets of oil sticking to the rocks.

All this, Mr Feng says, has allowed Daqing Oil to raise the proportion of the field's reserves that it is able to recover from roughly 35% to 45%. He hopes the firm will eventually be able to wring another 10% out of the reservoir by injecting more chemicals. But the operation involves drilling thousands of wells a year and requires a staff of 7,000 engineers.

The firm is also drilling elsewhere in the same basin in the hope of finding more oil. It has made some discoveries, but mainly of natural gas. Such new oil as it has been able to find adds up to only about 700,000 barrels a year, less than the main field produces in a day. Moreover, smaller, dispersed fields are more difficult and expensive to exploit. As Mr Feng observes with a stoic sigh, “even the thinnest camel is bigger than the fattest donkey.”

Throughout China geologists are discovering more donkeys than camels these days. Production has peaked at 10 of the 11 biggest oilfields in the country, according to the International Energy Agency (IEA). The overall amount of oil produced rose marginally in 2007, after remaining flat in 2006. But the IEA forecasts that this, too, will peak at 3.9m b/d in 2012, and then start to decline.

It hardly needs saying that China's demand for oil is moving the other way. More and more Chinese are trading in their bicycles for motorbikes and cars. Between 2000 and 2006 the number of new cars sold grew by an average of 37% a year, making China the world's second-biggest market. The IEA reckons it will overtake America to claim the top spot in 2015. The amount of oil used by Chinese industry, along with the transport networks that feed it, is growing rapidly too.

Back in 1990, China consumed just 2.4m b/d, leaving 400,000 b/d of domestic production for its oil firms to export. Now it guzzles over 7m b/d, about half of which it has to import. The IEA thinks that by 2030 it will gulp 16.5m b/d, of which some 13.1m b/d will have to be bought abroad. That is more than the current total output of Saudi Arabia.