China's Growing Appetites

June 1, 2004 Topic: Economics Regions: Asia Tags: BusinessIndustryIraq War

China's Growing Appetites

Mini Teaser: Oh, East is East and West is West, and never the twain shall meet--unless they need to secure access to strategic natural resources.

by Author(s): David Hale

The other commodity market where China is rapidly emerging as a major factor is oil. The International Energy Association is projecting that China's oil demand will rise to 6.2 million barrels per day (bpd) this year from 5.49 million last year. As a result of this surging demand, China has displaced Japan as the world's second-largest oil consumer and will become a progressively larger importer in the future. China became a modest oil importer during the mid-1990s and in 2000 imported about 1.3 million bpd. Analysts expect this number to rise to 2.5 million bpd in 2005 and 3.3 million bpd in 2010. By 2030 China's oil imports could reach 7.3 million bpd compared to 6.8 for Japan, 14.6 for Europe, and 24.3 for the United States. China is also making plans to import large quantities of liquid natural gas (LNG) from Australia, Indonesia and Iran.

China's oil demand is being driven by the industrial boom and rapid growth of car ownership. Private auto sales have increased from only token levels ten years ago to 2 million per annum recently. It is estimated that China could have 28 million private autos by 2010. As a result, autos could account for 40 percent of China's oil consumption in six years compared to only 10 percent in 1995.

Despite the large increases in demand, China's per capita consumption of raw materials is still very modest compared to America. In 2002 China's per capita consumption of copper was less than one-third of America's, while per capita consumption of aluminum was only one-fifth. It would not be difficult to imagine scenarios in which China could account for 30â€"40 percent of global metal consumption by 2025, as per capita consumption moves closer to the global average.

Does the world have an adequate supply of raw materials to satisfy Chinese demand? The world is well endowed with some minerals but could experience shortages of others if current growth rates of consumption persist for another decade. According to industry analysts, the world currently has 85 years of bauxite reserves, 55 years of iron ore reserves, 14 years of copper reserves, and 11 years of zinc reserves. The potential scarcity of copper could encourage more competitive bidding by global mining companies--including China's--for reserves.

China could be especially vulnerable to copper shortages because it satisfies only 18 percent of its consumption with domestic supplies. China is becoming a huge consumer of copper for the same reason it has done so for steel. Construction is the largest consumer of copper, accounting for 36 percent of global demand, followed by electronics (27 percent) and a variety of durable goods industries, such as autos. China has already made one investment in the Zambian copper industry and is searching for others. As a result of its domestic supply shortage, the odds are high that Chinese companies will scan the world for new deposits to develop in order to ensure an adequate supply for the domestic market when global supply conditions tighten during the next decade.

China's need for raw materials has led to large price increases during the past two years for iron ore, steel, copper, soybeans and other commodities. Since October 2001, the Economist's "All Items" index of commodity prices has increased by 59 percent. The prices of industrial raw materials have jumped by 73 percent. These price gains are not yet dissimilar to those that occurred during the cyclical economic upturns of the late 1980s and mid-1990s. In real terms, commodity prices are still far below their previous peaks. But if the global economy recovers further this year, there could be larger price gains.

China's demand for raw materials has also created concerns about commodity shortages in some sectors. Companies in North America and Europe have become concerned about steel supplies. In the United States, scrap-metal dealers have appealed to the Commerce Department to restrict exports of scrap metal to China because of the large price increase caused by Chinese demand. The Nixon Administration used to restrict exports of commodities during the high-inflation era of the early 1970s, but the current administration will be reluctant to ration exports to China at a time when the United States is running such a large trade deficit with the country, opting instead to let China reallocate commodity supplies by driving prices higher.


These developments will, in turn, lead to a variety of political and economic consequences. First, like previous Great Powers, Beijing will develop a foreign policy and military strategy to protect its access to raw materials. As its trade ties expand with commodity exporting countries in Latin America, Africa and the Middle East, China will want to ensure that they are reliable suppliers of critical raw materials. While the sheer growth of trade should help to promote good political relations, there are a number of ways in which China can be expected to hedge its bets.

As the experiences of the United States and Great Britain have shown, the capability to project military power outside the near abroad is essential to securing access to natural resources. Though it has been over 500 years since China last deployed naval vessels far from the country's territorial waters, if it becomes dependent upon raw materials from regions as diverse and complex as those mentioned above, it will have to develop the forces necessary--most importantly a blue-water navy--to protect its interests in these strategically vital areas.

China's current involvement in Sudan demonstrates both the type of situation in which China might find itself in the future and Beijing's potential response. China has already deployed 4,000 troops to Sudan to protect its investment in an oil pipeline developed with the Malaysian firm Petronas. China is concerned that Sudan's ongoing civil war could disrupt the pipeline, so it has moved to ensure the project's security. While there has been little international attention focused on China's role in the Sudan, it could set an important precedent.

China may also attempt to enhance its political relationship with the commodity producing countries in various parts of the world by promoting bilateral free trade agreements (FTA). Beijing, for example, is now holding talks with the Australian government about a potential FTA because of Australia's large reserves of natural gas, coal, iron ore and other raw materials. And at a recent Africa-China summit conference in Addis Ababa, China pledged to boost its two-way trade with Africa to $30 billion by 2005 from $12.4 billion during 2002. China intends to broaden its imports of oil and a variety of other commodities as well as to promote more investment.

Brazil, for example, is very excited about the potential for developing a "strategic partnership" with China. Brazil views a close relationship with China as a pillar of its foreign policy because it wants to promote a network of alliances with other developing countries to challenge American hegemony. The Brazilians believe China can play a major role in such a system. China actually regards itself as an emerging superpower, not just a developing country, but it will accommodate Brazil's ambitions because it plans to expand massively its trade with Brazil. Chinese firms are planning a $2 billion investment in Brazil's aluminum industry and a $1.5 billion investment in the steel sector.

China has already moved from being Brazil's 15th-largest trading partner in 1999 to being its second-largest last year because of large increases in imports of soybeans and iron ore. Brazil hopes to boost its China exports to $10 billion by 2005 because of demand for many commodities, including dairy products, cotton, tropical fruit, fish and coffee. Brazil also has the potential greatly to increase its output of soybeans. In 2003 China accounted for one-third of global trade in soy products and 20 percent of soy oil. As a result of China, Latin America now sends a rapidly growing share of its exports to east Asia, including 13 percent of pulp sales, 13 percent of steel, 43 percent of iron ore, and 26 percent of copper. As a result, Chile also plans to launch FTA talks with China.

China's need for petroleum could also transform its relationship with Russia. Trade between Russian and China is booming. It is likely to reach $22 billion this year, a level four times higher than it was five years ago. The countries are also planning infrastructure investments that could further enhance trade. In February China announced that it would embark upon a 15-year project to build a railroad that would run 870 miles from eastern Russia to Dalian, a seaport in Manchuria. China is anxious to develop corporate relationships with Russian energy companies to obtain petroleum. The Chinese also attempted to purchase a medium-sized Russian oil company, Slavneft, in 2002, but the deal was blocked by the Russian government. (The delegation from the Chinese National Petroleum Company was arrested when they arrived in Russia.)

China's ambitions in Russia, however, are complicated by the fact that Russia is highly insecure about its eastern frontier. The Russians fear that China could someday threaten their eastern territory because much of it was controlled by China before the conquests of the 19th century. There is also a huge imbalance of population. The Russian provinces in the Far East have lost 2 million people during the past decade, while it is estimated that 3 million Chinese have crossed the border. There are also 127 million people in the three adjoining Chinese provinces. At present, 66 percent of Russia's oil production and 91 percent of its gas production comes from fields in western Siberia. But oil analysts estimate that eastern Siberia and the Russian Far East could contain 110 billion barrels of oil.

Essay Types: Essay