China's Quest for Resources: The Lucky Country

CHINA'S QUEST FOR RESOURCES

The lucky country

Mar 13th 2008
From The Economist print edition

Australia can't dig fast enough to meet demand from China

CHINA'S insatiable appetite for commodities has been manna from heaven for the countries and firms that supply it. Take the iron ore that feeds the smelters of Shougang Steel and its rivals. Three mining conglomerates, BHP Billiton, Vale and Rio Tinto, control about 70% of the world's trade in iron ore. Each year they negotiate annual supply contracts with their main customers, and as demand has surged, so has the price. In 2005 it rose by a whopping 72%. The rate of increase subsequently slowed, but this year some importers have agreed to rises of 68% or more. Even after these swingeing increases, demand still outstrips supply.

Rising prices have brought rising profits. Vale's quarterly earnings have grown tenfold since 2002 (partly thanks to its takeover of Inco, a Canadian rival). Rio Tinto's share price almost doubled in 2007 alone (helped by its own takeover of Alcan, a Canadian aluminium firm). Now BHP is trying to buy Rio Tinto, in part to accelerate the growth of its iron-ore business. All these mergers and bids reflect the fact that mining firms have themselves become a hot commodity, growing in lockstep with China.


The three firms are all frantically expanding their iron-ore business to make the most of the windfall prices. The main beneficiary is Australia, the world's biggest exporter of iron ore. The output from Rio Tinto's mines in the Pilbara, in the country's arid north-west, has increased by an average of 15% a year since 1999. Between now and 2013 it plans to double its output, perhaps even triple it if necessary. Most of that would come from the Pilbara, which is closer to China than rival sources of ore. But starting in 2013, Rio Tinto also plans to ramp up production at an enormous new mine in Guinea.

Rio Tinto says it would be expanding even faster if it could. It more than doubled its capital expenditure between 2004 and 2007, and plans nearly to double it again by next year (again, the takeover of Alcan has played a part). But it is constrained by runaway inflation within the industry as mining firms everywhere race to invest. Growth has been so fast that suppliers cannot keep up, creating physical shortages of crucial inputs, such as tyres for the massive trucks that haul ore around the mines and locomotives to pull the long ore trains from the mines to the coast. The delivery time on both, says Tom Albanese, the firm's boss, is currently two years.

Rio Tinto is trying to teach its staff to drive more gently to extend the life of its tyres. It is also trying to automate more of its equipment so as to limit the number of workers who have to live in the singeing, barren scrubland of the Pilbara—and ease a chronic shortage of both skilled and unskilled labour. Mr Albanese says that recruitment of engineers in Australia has risen from a few dozen a year in the lean decades of the 1980s and 1990s to hundreds now. It does not help that BHP and various other mining firms are also trying to expand their output in the Pilbara as fast as possible, and that several oil companies are building or extending liquefied-natural-gas (LNG) plants in the area—with China as an important customer.

The shopping mall in Karratha, the area's main town, is full of “help wanted” signs. The local unemployment rate is 2.2%, less than half that for Australia as a whole—which is itself at its lowest for 30 years. Demand for goods and services in the Pilbara's home state, Western Australia, grew by 11% in the year to last September, faster than in China itself. The state's chamber of commerce predicts that this will slow to a somewhat less meteoric 6.5% this year and continue at 6% or so for some time—the chief constraint being the lack of able bodies to employ.

Last year Western Australia exported some A$8.5 billion-worth of iron ore to China. Helped by these exports, the state of Western Australia and the national government are both running handsome budget surpluses now. Chinese investment in Australia's iron-ore business is also booming. Gindalbie, an Australian iron-ore miner, and Ansteel, a Chinese steelmaker, agreed last year to invest A$1.8 billion in a joint venture to develop a mine in Western Australia.

Mine, all mine
Sinosteel, a big Chinese minerals firm, has bid A$1.2 billion for Midwest, a Western Australian iron-ore producer, trumping an offer of A$900m from Murchison, one of Midwest's local rivals. Chinese firms are even said to be thinking about a counterbid for Rio Tinto, to prevent BHP from cornering the market for ore. At any rate, Chinalco, a Chinese state-owned mining giant, recently teamed up with Alcoa, an American aluminium firm, to buy 9% of Rio Tinto's shares.

And iron ore is only part of the story. Australia is also the world's biggest exporter of coal, which brings in even more revenue than iron ore, and of alumina, used for making aluminium. Its exports of diamonds, zinc, lead, gold, nickel, manganese, copper and LNG are also growing rapidly, especially to China. Australia's farmers, for their part, are sending lots of beef, wheat, lamb and dairy products to China. China is now Australia's second-biggest market for agricultural goods, and the fastest-growing.

No worries
Australians' response to all this has been overwhelmingly positive. Politicians of all stripes vie with each other to be seen as China's friend. When John Howard was prime minister, he invited Hu Jintao, China's president, to make two state visits in the space of four years. The most recent one, which took place just before a big international summit in Sydney last year, was seen as a bid to raise Mr Howard's standing ahead of an election. But Kevin Rudd, then leader of the opposition, upstaged Mr Howard with his fluent Chinese. Mr Rudd, who went on to win the election, gave an interview to China's state-owned television network in which he promised to elevate Australia's relations with China “to a whole new level”.

Australians do not seem to suffer from the faint unease about China's rapid growth that often afflicts Europeans and Americans. Instead, they see China's rise as an opportunity. In a poll conducted last year by the Lowy Institute, a think-tank, a majority of Australians said they had positive feelings towards China and saw it as their country's most important economic partner. Only 19% said they were very worried about China's growing power.

Some Australian pundits have questioned the wisdom of allowing Chinese firms to buy so many mineral rights. But they have similar misgivings about all foreigners. In 2001 the Australian government barred Royal Dutch Shell, a Western oil giant, from taking over Woodside, Australia's biggest dedicated oil company, on much the same grounds. There are also fears that Australia might become over-dependent on China—but that is a sign of its enthusiasm for doing business with China, not of any reticence.

It is important to keep China's role in the Australian economy in perspective. It was not until last year that China unseated Japan as Australia's biggest trading partner. It still accounts for only 14% of the continent's exports, and in 2006 it ranked only 17th for foreign investment in Australia. These figures are bound to rise, and China's appetite for natural resources is already making a big difference to Australia's growth. But it is not the be all and end all of the Australian economy.