Journey Has Only Just Begun As Australia Rides The China Boom

The Age

Monday March 17, 2008

John Garnaut

Many years of strong growth still ahead, says Reserve Bank governor Glenn Stevens.

EACH month the number of new houses being built in the US drops to a new low and the world copper price takes a little hit.

This is because global hedge fund managers are programmed to know that every new American home eats up about 200 kilograms of copper wire, copper pipes and copper fittings, and each new home owner buys about 10 kilograms of copper in their home appliances.

So why, with the US suffering "about the worst housing market in a century" according to home lender Freddie Mac, has the copper price more than quadrupled in five years to hit another record high this month?

The answer seems to be that a surprising number of daily traders in the hedge fund world are playing yesterday's game.

US consumption of copper has fallen 8% a year for five years and accounts for just 12% of the world market, according to mining consultant Urandaline Investments. For all its considerable economic and financial woe, the US makes a minor contribution to changes in global demand for most commodities, other than oil.

China, on the other hand, already accounts for 27% of the world demand for copper and has clocked up 13% annual demand growth for five years. China buys 60% of all new global production. A better leading indicator for copper is China's fixed asset investment, which is growing at 24% a year.

This figure encompasses the greatest housing boom in history, with apartment blocks going up to house 1.5 million new urban migrants every month. It also includes the world's greatest road and railway construction boom.

In January, for example, Shanghai mayor Han Zheng warned commuters to brace for "tough times" because his municipal workers will obstruct more than 1000 roads as they dig away at a subway network that will end up one-quarter larger than the London Tube.

Mayor Han plans to build 116 subway stations this year - compared with Australia's grand total of seven - as he lays 276 kilometres of underground tracks by 2012. Beijing says its subway network will be bigger.

But China's construction industry accounts for only a quarter of the country's hunger for copper. New power generators and transmission lines consume double that share. China built more electricity capacity in the past five years than it did in the previous 50. But that was not enough.

Similar stories can be told for tin, which rose to a record $US850 a tonne on Friday. And oil, which hit $US111 a tonne at the weekend, and lead, iron ore, coal, uranium, wheat and almost every other commodity with which Australia happens to be overly endowed.

Some of this year's extraordinary run in commodity prices is no doubt exaggerated by a weak US dollar. But no amount of speculation can explain recent price gains for Australia's two biggest export earners - coal and iron ore - which are set by real shipment prices rather than tradeable futures contracts.

Reserve Bank governor Glenn Stevens spelt out the macro point in an internal seminar to Treasury last week.

"It is important to keep some perspective about the situation in which we find ourselves," he said. "We have been living through one of the largest transformations ... of the global economy, as far as Australia is concerned, for a century.

"... all the indications are that the rise of China is not just a cyclical event, but a structural change of the first order.... Short of some catastrophic event, China has many years of strong growth still ahead."

© 2008 The Age

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