Published June 20, 2011
June 20, 2011 – By Nick Trevethan
SINGAPORE (Reuters) - Famed market bear Nouriel Roubini may be talking down China, but resource firms are betting billions that rapid urbanization and economic growth will soak up the country's massive infrastructure investment and prevent a hard landing.
They are buying up competitors, investing in new capacity and speeding expansion projects to feed breakneck growth in raw materials demand in the world's top consumer of commodities.
Rio Tinto <RIO.L><RIO.AX>, Xstrata <XTA.L>, Nyrstar <NYR.BR> and Noble Group <NOBG.SI> in the past week have announced plans to merge or expand output or capacity -- risky bets if Roubini's scenario for the Middle Kingdom comes to pass.
"There is a meaningful probability of a hard landing in China after 2013," Roubini, closely followed by Wall Street because he predicted the U.S. housing meltdown that precipitated the global downturn, told a financial conference in Singapore.
But his dire warnings are at odds with the actions of raw material producers.
"(Australian) mining investment grew from $20 billion in 2009 to $50 billion in just a year, and that suggests the miners don't think Roubini's scenario will play out," said Ben Westmore, commodities economist at National Australia Bank.
"Those plans are likely predicated on some slowing in prices, but there is still obviously a lot of money to be made."
China's surging appetite created a commodity boom and a step-change for the market in the past seven years, with copper rising from around $2,500 to a series of record highs above $10,000 a tonne, only briefly interrupted by the global financial crisis.
Iron ore prices have leapt to almost $200 a tonne from $32 in 2004.
Xstrata Plc will start exporting iron ore to Asian buyers from Australia on Wednesday as part of an A$589 million redesign of its Ernest Henry copper and gold mine, the company said.
Exports of the magnetite-type material at a rate of 1.2 million tonnes a year are a key component of Xstrata's plan to transform the Ernest Henry mine from an open-cut design to an underground one, the company said.
Other companies are also seeking to expand capacity through mergers, including Nyrstar <NYR.BR>, the world's biggest zinc producer, which wants to acquire Canada's Breakwater <BWR.TO> for C$619 million ($639 million) as it carries out its strategy to buy more mines and increase self-sufficiency.
NEITHER GLOOMSDAY NOR DOOMSDAY
Roubini said investment was already 50 percent of China's gross domestic product and that sixty years of data had shown that over-investment led to hard landings, citing the Soviet Union in the 1960s and 70s, and East Asia before the 1997 financial crisis.
"I was recently in Shanghai and I took their high-speed train to Hangzhou," he said, referring to the new Maglev line that has cut traveling time between the two cities to less than an hour from four hours previously.
"The brand new high-speed train is half-empty and the brand new station is three-quarters empty. Parallel to that train line, there is a also a new highway that looked three-quarters empty. Next to the train station is also the new local airport of Shanghai and you can fly to Hangzhou," he said.
But other analysts argued that China's immense urbanization program meant that although some infrastructure may be under utilized at present, it would find customers in the years to come.
"You don't build infrastructure expecting to run at capacity on day one. You build based on future demand. The other question you need to ask is what is a hard landing for an economy growing at 10 percent?" said a bank analyst in Shanghai, not authorized to speak to the media.
"Is it a slowdown to 5 percent? Even that implies, assuming demand for commodities rises in line with GDP, an additional 400,000 tonnes of copper or more than 30 million tonnes of iron ore. China is about 'boomsday'. The risk of 'gloomsday', let alone doomsday, is slim."
Since 2007, China's GDP has grown by just under 10 percent on average each year, while copper demand has increased by an average of 25 percent annually and iron ore by 16 percent.
"Remember when you build a factory in China to make cars, you also have to build homes for the workers, hospitals, schools, shops and other infrastructure. All that adds to the intensity of commodity consumption, and that won't end for some time," the analyst said.
Already almost half of China's 1.34 billion population live in cities and towns, according to a census in April, up from 36.1 percent in 2000, although the previous census used a different counting method.
If that trend continues, over the next ten years around 200 million more Chinese rural inhabitants -- two thirds of the population of the entire United States -- will need housing, workplaces and household goods.
"Some of these analysts take traditional free market supply-demand techniques and try to apply them to a socialist market economy. It just doesn't work," said Jonathan Barratt, managing director of Commodity Broking Services in Sydney.
"The massive amounts of infrastructure just to keep up with population growth even as it slows will mean any dip will be well supported."
(Editing by Michael Urquhart)