Feeding the Dragon

Stephen DeAngelis

April 15, 2008

In my post China’s Hunger for Raw Materials, I noted that China is scouring the globe securing access to natural resources. Long gone are the days of the infamous “Cultural Revolution” when Mao Zedong tried to make China resource independent by having people grow gardens and smelt ore in their backyards. Now China is a net importer of most raw materials. Like the post mentioned above, this post is a continuation of the discussion of The Economist‘s special report on China’s quest for resources. The first resources discussed are the iron ore needed to keep China’s steel industry and the steel needed to keep its building sector growing [“Iron rations,” 15 March 2008 print edition].

“[China] has 7,000 of [steel mills], twice the number in 2002. Steel production rose by 15% last year, much the same rate of growth as in 2006. Since 2000, China has roughly tripled its output, making it by far the world’s biggest producer, with 37% of global output. It accounted for about three-quarters of the global growth in steel production between 2000 and 2005. China’s domestic production of iron ore has more than doubled since 2003, again making the country the world’s largest producer. But that has not been nearly enough to supply its proliferating steel mills. So imports have been growing by leaps and bounds too, from 148m tonnes in 2003 to 375m tonnes last year. They now account for half the world’s seaborne trade in iron ore. Citigroup, an investment bank, estimates that they will rise to almost 900m tonnes by 2014. And over the past few years it and other banks have had to revise such estimates upwards several times, as demand has consistently exceeded expectations.”

To feed all those steel mills it takes an enormous amount of ore — ore that China doesn’t have nearly enough of. The article begins with a brief history of China’s largest steel firm, Shougang Group. The company is building a new mill on an artificial island in China’s Hebei province, where it can be close to both ore deposits and access to the sea.

“Shougang … owns a mine in Hebei, conveniently close to its mills. But that does not provide enough ore for all of them, and other domestic supplies are scarce, so the firm has had to look overseas to make up the shortfall. It bought a mine in Peru in the 1990s and a stake in an Australian one in 2006. In addition to imports from both of those, it also buys ore on the international market.”

The article goes on to note that the stories for steel and iron ore are being mirrored in almost every commodity area.

“Much the same story could be told about many other commodities. Name almost any mineral, and mining firms and investment banks can produce charts depicting how Chinese demand has doubled or tripled since the beginning of this decade. Last year China’s copper imports surged by 80%. China is also importing ever more food. This is partly because more and more farmland is being given over to industry and partly because the population is growing. Moreover, as China becomes richer, its citizens are eating more meat, which contributes to rising food imports: producing meat for people to eat takes more grain than feeding people on cereals.”

In addition to eating more meat (up by more than 50% since 1995), the Chinese are consuming more dairy products as well. The average Chinese is now drinking more than six gallons of milk a year, roughly three times the volume consumed in 2000. Like cattle raised for beef, dairy cows consume a lot of grain as well. The repercussions of increased meat and dairy consumption, coupled with a growing global demand for grains to produce biofuels, means that grain prices are skyrocketing causing enormous concerns in developing countries [“Rising Grain Prices Panic Developing World,” by Ariana Eunjung Cha, Washington Post, 4 April 2008].

“A spike in the price of rice and other food staples is triggering consumer panic, including food riots in Yemen and Morocco, and hoarding in Hong Kong. Governments around the world have taken radical measures in recent weeks to control their countries’ supplies of rice. Egypt last week said it would ban all rice exports for six months. Cambodia has stopped all private-sector exports of rice, and India and Vietnam also have imposed restrictions. The price of grains — corn, wheat, and rice — has been rising since 2005 under pressure from farmers who would rather plant crops for biofuels than for food, the lack of technological breakthroughs in crop yields, and drought and disease. The sharpest increase has been this year, with the price of Thai rice, a world benchmark, nearly doubling since January, to $760 per metric ton. Some analysts expect that price to reach $1,000 in the next three months. Tang Min, a former chief economist for the Asian Development Bank, said the price increase is the inevitable consequence of supply and demand. ‘The world population is increasing, but the increase in the planting of rice has not been as fast,’ he said. Despite efforts by governments to increase public-sector wages and introduce food subsidies, price increases and shortages have led to violent clashes along supply lines, in food distribution centers and at supermarkets.”

The article in The Economist ends with a discussion about China’s appetite for oil.

“The commodity that best illustrates China’s abrupt transition from exporter to importer of resources is oil. … More and more Chinese are trading in their bicycles for motorbikes and cars. Between 2000 and 2006 the number of new cars sold grew by an average of 37% a year, making China the world’s second-biggest market. The IEA reckons it will overtake America to claim the top spot in 2015. The amount of oil used by Chinese industry, along with the transport networks that feed it, is growing rapidly too. Back in 1990, China consumed just 2.4m b/d, leaving 400,000 b/d of domestic production for its oil firms to export. Now it guzzles over 7m b/d, about half of which it has to import. The IEA thinks that by 2030 it will gulp 16.5m b/d, of which some 13.1m b/d will have to be bought abroad. That is more than the current total output of Saudi Arabia.”

Another article in The Economist’s special report deals with the environmental impact industrial development is having in China [“A large black cloud“]. It is largely the negative impacts of growth that has spurred the Chinese government to tap the brakes. Chinese leaders would also like to spread the benefits of growth from the prosperous coastal region into the much poorer interior regions. What the article really highlights, however, is the interconnectedness of things.

“The government has several motives for stepping on the brakes. One is simply to allow its bureaucrats time to plan for and direct growth. Its chief aim is to redress the growing inequality between the prosperous coastal provinces and the poorer interior ones, and between cities and the countryside. But slower, more carefully orchestrated growth might also avoid wasteful and disruptive bottlenecks. In 2003, for example, electricity consumption surged so unexpectedly that China began suffering from repeated brownouts as the grid ran short of power. That prompted millions to buy diesel generators, which in turn led to a 10% jump in oil imports in 2004. Since then electricity companies have been building power stations with gay abandon. In 2005 and 2006 they added more generating capacity than France has in total. That has boosted demand for coal, since most of the new plants are coal-fired. But most of China’s coal comes from the country’s interior and must be transported to coastal power stations by train. That is using up a lot of diesel (on which the trains run) and clogging up the rail network. So power stations have begun shipping in coal from overseas, turning China into a net importer in the first half of 2007 and prompting the huge queues of freighters outside coal ports such as Newcastle, Australia. These lurches in demand for different resources have added to the jitters in commodity markets and helped to amplify price rises. The government is also worried about security of supplies. … The environmental fallout from China’s burgeoning demand for natural resources is another source of concern. Processing iron ore, timber or oil requires electricity, and 80% of China’s electricity comes from coal. But the sulphur that spews from the smokestacks of coal-fired power stations causes acid rain and the soot generates smog. In many Chinese cities, a thick shroud of pollution literally blots out the sun much of the time. Acid rain, meanwhile, reduces agricultural yields and eats away at buildings and infrastructure. The OECD cites a finding that air pollution alone reduces the country’s output by between 3% and 7% a year, mainly because of respiratory ailments that keep workers at home.”

China is likely to continue its military buildup to protect its access to natural resources (historically growing countries from England to Japan to America have all done the same thing), but China is now so dependent on natural resources from the rest of the world that it would be tantamount to economic suicide for it to use its military aggressively rather than defensively. I realize that sounds like Norman Angell, who famously argued just before the First World War that transnational economic independence had made war a thing of the past. One big difference between then and now is that Europe was relatively rich and euphoric about the future. The “Great War” was seen as a coming of age event and young males happily marched to the frontlines to prove their manhood — expecting to be gone a couple of months and then return to their cheerful lives. We now suffer from no such illusions. China understands it has big domestic challenges that would only be exacerbated by global conflict. I don’t mean to imply that confrontations won’t take place — they’re almost inevitable — but internal Chinese politics will likely play a larger role in the direction China takes than foreign policy. Chief among those concerns are environmental issues.

“China’s water supply, [for example], is in a parlous state, thanks to ever-increasing industrial and agricultural use. The amount of water available per head of population is only a quarter of the global average. In the arid north and west of the country that figure falls to a tenth. Two in three cities already suffer from shortages. Groundwater is being pumped out much faster than it is being replenished. Not even Beijing treats all its sewage; other cities treat none at all. Famous beauty spots, such as Taihu Lake near Shanghai, are often afflicted by hideous algal blooms, while effluent from polluted rivers has contaminated 160,000 square kilometres of ocean off China’s shores, officials say. Over half the water in the seven biggest river basins is unfit for consumption, according to a recent report from the World Bank. The resulting health problems reduce rural output by 2%, it found, and the costs to industry and agriculture of dirty and scarce water sap GDP by another percentage point. All told, the World Bank put the price tag for China’s air and water pollution at $100 billion a year, or about 5.8% of GDP.”

Wealth and pollution generally have a difficult time sharing the same space. That is the situation in which China now finds itself (“the environment is the second most frequent subject of public protests after disputes over land”). It will take an enormous effort for China to clean up the mess it has created, but it has the wealth to do so — if it behaves well internationally. I suspect, for the most part, it will.