The mutually beneficial relationship between world economic powerhouse China and resource-rich Australia still has a long way to go.
By Clifford Coonan
Wandering through a construction site in the southern Chinese boom town of Shenzhen, where yet another factory is being built, the dizzying statistics behind the resources boom underpinning Australia's ruddy economic health take on a very real dimension.
These statistics are marked out in zinc, copper wire and, most importantly of all, iron ore.
There are circuit boxes and steel girders on this site, crucial elements of the giant construction project to build the factories that are fuelling China's astounding economic boom, where double-digit growth has become the norm.
China needs the ore to build the Olympic stadium and signature buildings for next summer's games in the capital Beijing. And to fashion the cars thronging the streets of Shanghai, Guangzhou and Chengdu. It's a country in a hurry, where it makes more economic sense to import raw materials than exploit its own under-explored assets.
Australia is the largest exporter of iron ore in the world and China the globe's biggest consumer. With the iron ore dug out of the ground in Western Australia and shipped to the world's fastest growing major economy, it's led to what Macquarie Bank has called a 'once-in-a-generation demand boom' for minerals.
In terms of the amount of resources it uses, China builds a city the size of Brisbane every month, using 59 per cent of the world's iron ore production, used as the raw material in steel.
To get to this construction site in southern China, you drive for miles without seeing a break in the landscape of factories. China is a country hungry for resources, and filling that appetite for natural gas, coal, iron ore and timber has driven one of the most remarkable economic booms in Australia's history. There is no anecdotal evidence in China that the resources boom is likely to slow any time soon.
Nor is there much in the way of statistical evidence to prompt fears for a slowdown in Australia's China-driven resources boom. China already uses more than 30 per cent of the world's zinc and about 25 per cent of the world's copper. Think of every building being constructed to house the millions of migrant workers moving from the countryside to the boomtowns of Shenzhen and Dongguan every circuit board is wiring. Zinc is needed to galva-nise appliances like washing machines, for the girders propping up the freeways and all the other building materials being used on this site.
'Those who think the end of the minerals boom is nigh should get out more,' says Owen Hegarty, managing di-rector and chief executive of mining company Oxiana. Hegarty is a famously charismatic figure in the industry and one of the shrewdest readers of the growing hunger for resources in the world's fourth-largest economy.
'I don't believe this is a 'resources boom' but the early years of a long period of sustained economic expansion. And as we all know the lion's share of that growth is coming from China,' says Hegarty.
'The rate at which China is growing is fantastic but it is still only at the beginning of this journey. The people of China today and its government have an obvious desire to see their country reach its full potential,' says Hegarty.
The price of iron ore has more than doubled in the past three years and the broker UBS is forecasting a 25 per cent rise in iron ore prices for the shipping year starting 1 April 2008. That's no April Fools' Day joke.
There is also a lot of iron ore around. Western Australia's Hamersley Range alone contains around 30 billion tonnes of iron ore, enough to keep the steelmakers rolling out product for years to come. And there are other areas like it dotted throughout the outback. The links between China and Australia are strong, underlined in truly high-profile fashion with the election of an accomplished Mandarin speaker, former diplomat Kevin Rudd, as prime minister in November.
China is Australia's second-largest export market, worth over A$24 billion, and its second-largest trading partner, with A$50bn worth of two-way trade and 3800 companies selling to China. One in five of all exporting SMEs are involved in the China market a proportion that has doubled in only two years.
The deals have come thick and fast this year. The giant Anshan Iron & Steel Group has moved to buy 13 per cent of Perth-based iron ore producer Gindalbie Metals Ltd for A$39 million. Centrex Metals has signed iron ore sup-ply deals with Chinese steelmakers Shenyang Orient Iron & Steel and Baotou Iron & Steel (Group).
The Chinese are keen to build railroads to bring the stuff out. A big driver of economic growth in China has been the southern region, which is home to powerhouses along the Pearl River Delta, such as Shenzhen and Guangzhou. The area makes up over one-fifth of China's GDP and produces over 36 per cent of China's exports, while its population of 250 million makes it a strong consumer market too.
Taken on its own, southern China accounts for 22 per cent of Australia's total goods export to China, making it Australia's ninth-largest export market.
To get a feel of just how bullish the outlook is for Australia's resources links to China, look at Australia's two largest iron ore producers BHP Billiton and Anglo-Australian powerhouse Rio Tinto which are each banking billions of dollars on doubling or trebling output in the next five years. (At the time of printing the latter was the subject of a takeover by the former.)
There are long links between this region and Australia, and Austrade's chief economist Tim Harcourt draws paral-lels between the gold rush of the 1850s when many Chinese from southern provinces such as Guangdong and Fujian came to have a shot in the gold fields.
'From the gold rushes to the resources boom of the early 21st century, Southern China has had a lot to do with Australia. However, on present trends, today's boom in commodities particularly in LNG, coal, iron ore and barley will make the 19th century boom look like pretty small beer,' Harcourt wrote in a research document.
The Chinese regional focus has been on Western Australia, transforming the sparsely populated region into a land of iron ore billionaires. Some 60 per cent of Australia's exports to China come from Western Australia, and 40 per cent of China's iron ore needs. Chinese steel mills have bought stakes in local iron ore mines and processing plants. You dig it out of the ground, and we'll buy it that seems to be the message.
There is a view among economists that China may have reached economic take-off, where urbanisation has seen surplus labour in rural areas dry up and real wages are rising.
However, as Hegarty points out, at this point in Japan's and Korea's history, growth became much more resource intensive which means that China's current de-mand may only be in its early stages, hence the predictions that the increase in China's demand for metals between now and 2020 may be equal to today's current total world demand.
'So the demand is there,' says Hegarty. 'There's bound to be a few bumps along the way, but this is unstoppable textbook economic growth on a scale not seen before. And then there's India and the other BRICS [Brazil, Russia, India, China, South Africa] to follow.'
Hegarty believes the challenges remain on the supply side. 'On the supply side, we have also seen a reduction in the number of minerals discoveries and the number of mines coming into production declining. Those mines that are being developed are suffering cost increases and delays due to labour and supply shortages, and the ongoing operating costs of mines has increased significantly,' he says.
Much of the boom is focused on China's haste it needs to import the raw materials to support its massive industrialisation rather than better exploit its own natural resources.
This seems to indicate an upside on the exploration side, which could also be a bonus for Australian companies that have developed world-class expertise and technology in this area. Only 4 per cent of the world's exploration spend last year was in Asia, of which only a proportion was in China, so the terrain remains relatively under-explored.
'China is a highly prospective nation for resources in its own right. The Chinese are more actively exploring for their own resources both in their own right and in some cases with foreign partners; and Oxiana sees great poten-tial for the discovery of world class deposits in this under-explored domain,' says Hegarty.
To this end, Oxiana has set up an exploration office in Yunnan Province and has three joint ventures and MOUs with Chinese companies exploring and looking at development opportunities for gold and base metals.
Pressure on the resources boom may come from Canberra itself the Labor Party's environment spokesman Peter Garret has been forthright in attacking the previous government's record on the environment.
The Rudd administration has ratified the Kyoto protocol and vowed to increase investment in green technology and cut greenhouse gas emissions, as well as boost renewable energy sources.
Whether this is politically feasible remains to be seen. China also faces some bottlenecks emerging on the logistics side, with ports seeing lines of ships and long tailbacks on the roads, but a drive from the factory towns to the ports on the southern and eastern seaboards shows massive investment in infrastructure.
For the foreseeable future, pristine freeways, new container ports, a new car for everyone, and a shiny airport in all of the country's 108 major cities is the government's chief aim. The investment on infrastructure also marks a ma-jor spend on the country's future. With this kind of spending going on, don't bank on the resources boom fizzling out any time soon.
Clifford Coonan is a journalist based in Beijing. He travelled to Shenzhen in southern China to write this story.
Further information
read China: the balance sheet: what the world needs to know now about the emerging superpower by C. Fred Bergsten et al, Public Affairs, 2007
read Chindia: How China and India are revolutionizing global business by Pete Engardio, McGraw-Hill Companies, 2007
read The new iron age by Brian O'Keefe, Fortune, 26 November 2007. Resourceful super by Kimberley Gaskin, Superfunds, November 2006
