The China Syndrome

The recent Chinese growth offers no doubt that it is the real source for the recent rise in commodity prices of all types.

Last year, China consumed 40% of the world's cement, 7% of the world's total consumption of crude oil (surpassing Japan as the #1 importer of oil), 31% of global coal, 30% of iron ore, 27% of steel products, and 25% of aluminum.

Don't forget that this comes from an economy that is much less than 10% of the world's GDP!

Early this month, a report pointed out the huge problems in shipping being created by the hunger of China for materials to build its growth. At Beilun port near Shanghai, one of China's major iron ore import terminals, ships must wait for up to a month to berth and offload.

China is expected to import 180 million tons of iron ore this year, up about 21% from last year. They need it for its steel, construction and auto industries.

But it is not just in China that long shipping lines are developing. At ports in India, ships must wait for as long as 30 days to pick up iron ore on the way to China. In the Reuters report, industry experts estimate that as much as 25% of the world's bulk shipping capacity is now tied up in port waiting lines.

This can be expensive, as leases on these ships may run up to $100,000 per day. This bottleneck in shipping is making already high prices for commodities, grains and soybeans even worse. According to a Cazenove report, last year China accounted for 70% of the global increase in seaborne dry bulk trade.

Container freight rates rose about 30% last year and are expected to rise another 10% this year. The Baltic Dry Index, a benchmark for freight rates of dry cargoes such as ores and grains, jumped more than 170% last year.

Want to build some ships to take off the strain? It will be 2008 before you can get delivery and forget about a firm quote, as who knows what the price of steel and energy will be?

As fast as China is building infrastructure, they are still behind the curve. There is only 60% of the needed rail network capacity for moving coal from the port areas into the interior.

Last year, China grew officially at 9.1%. Private estimates are closer to 12%. Such growth is unsustainable, if for no other reason than infrastructure cannot keep up with the growth demand.

China at 4.4% of world GDP overtook Britain at the end of 2003 calendar year, and will pass France by the end of 2004 or early 2005. Sometime on or around 2010, it will overtake Germany; and between 2015-2020 it is expected to overtake Japan to become the world's second largest economy.

All other things being equal, China would need to grow its GDP at 3% per year faster than the USA for some 65 years to catch the world's number one. An improving exchange rate against the $US would, of course, shorten this period.

When will the Chinese government allow the Renminbi to float, and how far down the dollar will fall when it does? There is little doubt that a floating Renminbi will trigger all sorts of changing economic trends, but depending upon when and how the float is begun, it may not be the disaster for the dollar that many expect.

There are a lot of forces at work in China right now, and one thing is clear: The "Chinese Syndrome" effects will bring a dramatic revision on the world economy!