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Jan 2006 - CHINA

China is not expected to suddenly grind to a halt

We remain surprised that a number of people still don’t believe that China can continue to consume metals and materials for many years to come and not suddenly grind to a halt in 2006, 2007 or 2008. Quite often such people have never been to China and are basing their expectations on theory.

This column is based on observations made during my recent visit to China in November 2005 when I attended the China Mining Conference in Beijing. After the conference I visited the properties of Golden Tiger in eastern Guangxi, and Golden China (who have announced they want to merge with Michelago) in southern Guizhou. Guangxi and Guizhou are both classified as some of the poorest Provinces (relative to Shandong) in China, such that they attract higher tax breaks.

Almost 2 years ago I saw a freeway being constructed in Guangxi from Nanning, and this year (Nov 05) I travelled on it non-stop for about 300km on the way to Wuzhou in far eastern Guangxi. The remaining 100km to Wuzhou are under simultaneous construction ready for completion in 2006 when the new freeway is expected to link Nanning with Guangzhou via Wuzhou.

The freeway is a feat of engineering with concrete channelled rain run-off lattices on the sides of hills that have been sliced through (similar to the one shown in our column in the June 2004 issue of “Paydirt” [Vol 1 Issue 207 page 15] ). On the way to Golden Tiger’s exploration property near Wuzhou I saw a limestone mountain being excavated and turned into gravel for new railway line foundations.

On the outskirts of Wuzhou (a typical 2-3m populated city), a massive area was being cleared for an extension to the city. Some streets showed placards of what Wuzhou is ultimately expected to look like, often comprised of skyscrapers. In one of the presentations at the 2005 Conference a slide comparison was shown of Shanghai with its current 4,000 skyscrapers and a further 1,000 skyscrapers have received development approval, compared to Boston’s 25 skyscrapers.

The level of building continues even in the poorer provincial capitals of Guiyang in Guizhou and Nanning in Guangxi. Guiyang still appears to be in the apartment block phase, demolishing older buildings and building skyscraper apartment blocks using the top-down approach of building the structure and completing the building from the top down. It is not difficult to understand why there is a copper shortage with buildings still copper wired (the main telephone connections are through using mobiles – I often get a better reception in the wilds of China than in my own house in Sydney).

Whereas Nanning seems to have moved on from the apartment block to the office / hotel block phase, offices tend to be a single blocks compared to the multi stand areas of apartment blocks as shown in Figure 1.

While new airports have already replaced the older ones in the main cities such as Guangzhou’s about as wide as the length of the Qantas domestic in Sydney. New airports are being opened in regional “county/prefecture” cities such as that at Qingyi in southern Guizhou (apparently just over 4 hours drive from Jinfeng, but only about 1 hour from Golden China’s Nibao). The Shandong Airlines flight from Qingyi to Guiyang was in a brand new aircraft of a style that I have not as yet seen in Australia. As for Beijing, the new N/S underground No 5 line is under construction as shown in Figure 2, for the 2008 Olympics.

Note in Figure 2, the relative absence of old cars, and also that the sky is clear and blue. The current underground only costs 50Ac (3Rmb) per journey between any stations on the main red and blue line networks – trains are modern and the underground is bi-lingual (English / Mandarin – in fact the freeway signs have also become bi-lingual since last year too).

I bought a new map of Beijing in English which was considerably more up-to-date than the previous main one which can best be described as a “guideline”. The main 5-storey jam-packed (bookwise) Wangfujing bookshop in Beijing had two “islands” devoted to touring guides and maps of China, compared to last years’ about 2 types. China appears to be gearing itself up for the tourists visiting the 2008 Olympics – the date and time is easy to remember, it’s 8pm on the 8 August 2008.

Just in case there are still a few lingering doubts over China’s demand for commodities, a number of statistics were given at a Sydney conference earlier in 2005 such as : the current population of about 1.3bn has ~360m households, ~300m TVs, ~200 TV stations, ~2,000 newspapers, ~90m internet users and ~5m graduates per year.

Construction in China was expected to continue rising overall from an average of 19.5%pa from 1994 to 2004 to 21%pa in 04/07e. China now has 22 cities with populations >2m and a further 345m people are expected to move to the cities by 2020. As for infrastructure, transportation of goods is mainly by water (53.3% at an average of 1855km), then rail (32.2%, average 768km), road (14.8%, 58km), and lastly air (0.1%, 2482km).

Starting with air, there are currently 143 civil airports with plans for another 110 by 2015. The Shanghai Pudong airport handles 500 flights per day on Runway 1, with opened in April 2005 to handle A380 Super Jumbos. Airbus in fact expected to sell 50% of the 100 new A380’s to China in 2005.

From 1996 to 2000, the road network increased by 18% or 216,900km to 1.4Mkm whilst traffic increased by 20%. A further 200,000km is planned to connect 93% of the villages across the country. Western China’s motorway network is expected to have increased from 2,700km in 2000 to 15,000km in 2006, with SW China expected to construct >42,000km of roads by 2011. The 15-year MOFCOM plan to 2020 is to have 3Mkm of highways and 85,000km of super highways linking cities and countryside villages.

At 75,000km, China has the third largest railway network in the world (after the US at 230,000km and Russia at 85,000km). US$42bn is being invested into 6000km of new lines and 3000km of double-tracks, with the US$3.3bn link with Tibet due for completion in 2007. By 2010, China expects to have a 90,000km railway network of 8 horizontals and 8 verticals of which 40% is electrified and 40% is double-tracked.

China’s 14,500km long coastline contains 200 sea ports handling >1.7bntpa of cargo. The new Yangshan deep-water port being built at Shanghai expects to have a 10km long deep-water shoreline and 50 deep-water berths. In 2004, Chinese ports handled 48m containers being 25% of global transport. Of the cargo ports, the largest tonnage handled in 2004 was Singapore at 388mt, with Shanghai a close second at 379mt.

It can be seen how reputedly 48% of the world’s cement was consumed in China during 2004. It can also be seen that China’s growth does not appear to be a tap that can suddenly be switched off. As was commented in China Mining 2004, China is currently in 10-year Growth Phase 1 to 2010, when it is expected to accelerate into Phase 2 to 2020 (well, the world is trying to cope with Phase 1, yet alone higher consumption demand from 2010).

From what I could see, the main potential restriction to China’s growth appears to be insufficient raw materials in the world and hence it is no surprise to see Chinese based companies trawling the world for orebodies that have long-life (ideally 10 to 20 years plus) potential and are prepared to finance their development

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is an Authorised Representative with Taylor Collison Ltd, and with his associates, holds interests in some of the stocks mentioned in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

  • Written by: Keith Goode
  • Sunday, 01 January 2006