China remains the “main game” in the current global demand for resources, Australian mining industry stalwart Owen Hegarty said yesterday. Speaking in Adelaide on the first day of the annual Australian Resources Chinese Investment Congress (ARCIC), being held at the National Wine Centre, Hegarty, said as the world continued its long period of economic expansion, “emerging” markets - with China leading the pack - were the future. China was currently enjoying what he labelled “China GQ” - China’s Growth Quintella - which was benchmarked around:

• An accelerating consumption from a growing middle class
• A metal intensive stage of economic development
• The largest urban migration in world history
• Massive infrastructure development
• A social and political imperative.

“China’s Gross Domestic Product (GDP) is unstoppable at present……it will double within five years and quadruple within 10 years,” said Hegarty, the former founder and CEO of Oxiana, and now Executive Vice Chairman of G-Resources Group.

A continuation of higher and more volatile metal prices has been predicted as the China growth surge continues to impact Australian and international commodities, according to a key research house. The prediction was matched by a forecast of China needing to move to one billion tonnes of steel consumption by 2020. Speaking in Adelaide on the first day CRU Group Associate Consultant, Dr Allan  Trench, said metals prices had increased dramatically over the past 10 years, with star performers in the non-ferrous metal group being lead, copper and tin. 

“Aluminium and zinc prices have been more subdued but nevertheless they too have seen substantial price increases,” Trench said. ”Over this period, we have also seen an increase in price volatility and CRU expects a continuation of that trend - higher and more volatile metals prices - driven primarily by generated by China’s consumption of metal. This has been a dramatic lift - up from 10% of global consumption (for the non-ferrous metals i.e. excluding steel) to more than 40% currently. China’s transformation - modernisation, industrialisation, urbanisation and development - will continue to take a greater share of metal consumption into the medium term forecast period. There was a step change in the pace of growth following the 2008 recession but China’s growth is expected to continue because industrialisation is metal intensive.

“China’s consumption growth, while also cyclical like elsewhere, remains positive strong. Its steel and aluminium industries are strategically important to its development path and in those sectors, it has developed an export capacity - a factor that has kept these particular metals prices from globally rising to the highs seen across other metal commodities.  The downside for China is that that comes at the expense of imports of such raw materials as iron ore, coal, alumina and bauxite”.

Trench said this export import equation had created opportunities for low cost Australian and other overseas producers, even despite variations in cash costs and metals exchange pricing. “Mining houses wishing to fill this market space can’t do ‘everything’ simultaneously and that has created room for smaller scale commodity-specific producers to add to contestable supply, particularly for copper, nickel, iron ore, coking coal and zinc - and bearing in mind it can take ten years between discovery and a working mine.

“It is our strong view that Australia needs more mining investment now - for the long term - particularly to satisfy Asian - and that means Chinese - demand. There are some bottlenecks around managing the most commercially viable projects but our predictions suggest that Chinese steel demand could easily rise above 1 billion tonnes by 2020.

“We expect robust global demand growth for steel in the long term as while China is currently consuming around 500 kg of steel per person per year, further increases in steel intensity can be expected based on lower-income provinces, potentially following the pattern of consumption in higher-income, largely coastal, provinces. 

“CRU would therefore confidently expect per capita steel consumption in China to drive upwards towards 750 kg per person in the coming years and likewise as income per capita increases are seen in India, Russia, Brazil and other developing economies, so steel use is expected to ramp up, following a similar path to the now fully industrialized countries. This demonstrates the potential of many nations to drive forward global steel consumption in the coming years, and more than that, make up for little to no growth beyond pre-crisis levels in more developed countries.”

However, there was a warning from the ANZ’s Senior Economist, Shane Lee. Long-term under-investment in infrastructure in fully urbanised western countries, paired with emerging strong urban growth in China, Asia and India and its associated commodities demand, is fuelling the pressure and ability on Australia to lift its own infrastructure investment levels, according to this senior banking economist. He said it was preferable if certain financial resources were dedicated to infrastructure despite economic cycles.

“There is a very direct and strong link for example between domestic and export demand for steel and concrete needed for infrastructure and demand for our raw resources but as economies grow, so too needs to be an adequate and competitive level of infrastructure investment,” Lee said. “As a guide, for advanced economies like Australia, we need to be allocating around 1% of GDP to roads, about 0.5% GDP to electricity, a similar investment in telecommunications and around 0.2% on rail networks.

“Overall, we should be looking at a total infrastructure spend per annum of around 2.5% GDP. There has been a pickup in such domestic infrastructure investment since 2005 and we should expect much higher energy infrastructure spends in coming years driven by the large LNG projects in Western Australia and Queensland. However, this pickup is against a background where the statistical data available suggests the age of our infrastructure assets since 1972 increased considerably from 16 years to 21 years, with only minor pullbacks from about 2003 - but the trend is improving.

“With major new mining and energy projects now underway, the infrastructure investment outlook for 2014 is extremely strong and still strong going into 2015. It gets a little clouded after that as we are unsure just which of the mooted big projects will actually get underway between 2013 and 2015 - and we should expect that that will create some policy issues for the Reserve Bank and policy makers.”

Lee pointed particularly to an ongoing strong outlook for Australia’s coal and agricultural exports, and a rebound next year in national GDP after flood impacts of this year.

“Future structural change to accommodate commodities demand in parallel with infrastructure investment will require this change to be accommodated by policy makers to ensure efficiencies particularly in our sea port and rail export networks.”