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Jul 2008 - Boom Not Over

The Commodity Boom is NOT Over Yet!

Returning from China on 22 June 2008, we read in the FT that the Brits had sold out of commodities because they believed that the commodity boom was over. The following day, RIO announced iron ore price increases of 79.9% to US$144.66/t for its Pilbara fines and 96.5% to US$201.69/t for its Pilbara lump ore and RIO’s share price fell because even higher price increases had been expected.

Well, figure 1 shows a photo taken on 21 June 2008 of a typical street corner in Chengdu, with the old buildings being replaced by a skyscraper, fronted by increasing car traffic. I lost count of the number of corners of blocks in Chengdu that were being knocked down and replaced by skyscrapers, and the number of new blocks and cranes, and more cranes, just in the half hour drive to the new airport.

However, it is not the frantic construction that we saw about 4 years’ ago, more simply steady replacement and construction, and occasionally incorporating architectural designs in different geometric patterns or more futuristic styles of architecture along the lines of the Olympic Stadium “bird’s nest” in Beijing.

Chengdu is a city in the Sichuan Province of China’s Middle Kingdom with a population of about 12m or so, depending on where you put the boundary. Often it is linked to Chongxing (a number of hours away) to result in a population of 32m. Chengdu is in the process of putting in a new metro system from scratch in the traditional way (lift up the centre of the road, put in the metro, resurface the road and carry on), demolishing the odd building as required for an underground or metro station.

Chengdu was about 100km from the earthquake, and the buildings reputedly rocked a bit, but none of them fell down, and it certainly hasn’t slowed the pace of construction in the city. Chengdu along with Chongxing have been named as feeder airports for the new gateway airport to be constructed at Kunming.

Kunming is to become one of the new 97 airports to be built by 2020, and highlights one of the facts about China, namely that the rest of the world seems to talk about and hold conferences for a futuristic vision of 2020, whereas China has a 2020 fully detailed and costed construction plan.

Of which the airport component has been costed at ~US$64bn raising the current 147 airports to 244 by 2020, with airport clusters in the northern, eastern, central, southern, southwestern and northwestern parts of the country. Shanghai’s Pudong airport has just opened its 3rd runway and Guangzhou has started constructing its 4th runway (scheduled for completion in 2010).

The transformation in the airports is simply staggering in the past 5 years from what we first experienced in 2003, with abundant usage of stainless steel, and more recently picturesque scenery in frosted glass.

We (ERA) also visited Guiyang in Guizhou in June 2008, which is also undergoing a fair amount of construction, plus 3 new freeways. Figure 1 also partly shows the increasing amount of traffic, and logjams are reportedly becoming more common, which is quite understandable given that China’s Auto Association has forecast that 5m new vehicles will have been produced and sold for domestic use in the first 6 months of 2008.

Nissan in an SFJV with Dongfeng have also announced that they are building their 3rd passenger car plant as they expect to be unable to meet demand of 1m of their vehicles per year by 2010 (up from ~600,000 in 2007). We are unaware of how developed China is becoming with hybrid cars, but they already have extensive battery-powered motor scooters that can be linked up to the mains overnight.

With the increase in the amount of traffic, the road rules don’t appear to have changed – they are interesting in that aside from traffic lights, they appear to be basically ignored. As someone once said, “if you drive in China, don’t hesitate”. We read recently, that some towns in Europe have removed all their road signs and the accidents have stopped, because the motorists have to look at what the other road users are doing. Perhaps that’s why it “works” in China too, and you can drive towards oncoming traffic. As for the pedestrian usage of level crossings, well….

It also remains to be seen whether the plan of banning all non-Beijing registered cars from entering Beijing and odd number plated cars one-day, even the next for the 3.3m registered private cars in Beijing from 20 July to 20 September does reduce pollution and result in clear skies over Beijing during the Olympics. The rule also applies to the 300,000 Government vehicles, with exemptions for diplomatic and public service vehicles including buses and taxis.

Following the Sydney 2000 Olympics example (lets face it, it was absolutely fantastic – however, the Sydney transport network has been a shambles since then), Beijing intends to have 21,000 buses, a fleet of taxis, the new subway network (they have put in 6 new lines in about 4 years, upgraded the stations and converted the whole system to T-cards) and a 264km network of Olympic traffic lanes for the expected 15m commuters. All trucks intending to pass through Beijing are to be diverted to expressways on the outskirts of the city.

Beijing had a reputation, like a few other cities in China, for pollution. However it has to be acknowledged that we have seen clear skies in the past two years (each November) even to the extent of seeing the mountains ~50km away at the end of some of Beijing’s streets in November 2007.

Some people have commented that other countries are following in the wake of China’s construction progress. We have seen some of them and they mostly appear to be just a fraction of what is going on in China. Though China’s pace of growth may slow down to some degree, the momentum is simply staggering and infers that the commodity boom has the potential to last for a few more years yet.

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, may hold 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.

Figure 1. A Typical Street Corner in Chengdu, Sichuan Province, ChinaGDNjul08

  • Written by: Keith Goode
  • Tuesday, 01 July 2008