Saturday, September 24, 2005

One might have seen it coming...or not.

China drives commodities boom...and the fortunes of the corresponding value chain.


The good times roll for China's log importers as the economy surges: Deforestation controls by the Beijing authorities and unprecedented demand from builders and furniture exporters bring boom in timber imports, reports Richard McGregor.

817 words
21 September 2005
Financial Times
Asia Ed1
Page 3
(c) 2005 The Financial Times Limited. All rights reserved

When Sun Laijun set up a log-importing company in a smallish Chinese town bordering Russia in 1998, it was about as well-timed as staking out a large tract of land just before a gold rush.

First, after massive floods that year blamed on deforestation, China sharply restricted logging at home. Then the domestic economy took off, sending Chinese buyers of wood scouring the globe for new supplies, much of which they found in the Russian far-east.

Since then, Mr Sun's business has grown at the same blistering pace as the cross-border trade in lumber between China and Russia, increasing sixfold in as many years.

"My trading volume is now the number one in the province," says Mr Sun in his office overlooking his yard in Suifenhe, hub of the cross-border timber trade.

But the good times and high profits that merchants like Mr Sun have enjoyed may be coming to an end, as the timber business gets squeezed by the same nasty pincer movement afflicting a host of industries in China.

Red-hot Chinese demand is tightening supplies and forcing global prices of wood higher, while cut-throat competition in an overcrowded industry at home means producers have no power to pass their higher costs on.

Matthew Brady, a Beijing-based industry consultant, said a big hardwood floor maker in Dongguan, the manufacturing heart of southern China, had told him his business could only fulfil two-thirds of its orders because it could not get enough wood.

"The industry cannot get enough raw materials, and the raw materials they are getting are costing a lot more," Mr Brady said.

In the brief time since the logging restrictions were imposed in 1998, China has gone from seventh largest importer of forest products to second, behind the US.

The largest growth has been from Russia, whose log exports to China rose almost 80 per cent each year between 1997 and 2003, according to Forest Trends, which tracks the industry.

The next largest suppliers are, in order, Malaysia, New Zealand, Papua New Guinea and Gabon.

Chinese demand has been driven by the construction industry as well as furniture exporters whose sales overseas grew 40 per cent a year between 2000 and 2004, mainly to the US.

But even in the midst of this astounding boom, the competition and the pricing pressure are such that Mr Sun, of the Suifenhe Shanglian Group, says he is struggling to maintain his margins.

"The Russians know our market very well now, maybe because they have too many Chinese working for them," he says.

China is also starting to feel pressure from environmentalists, who say Beijing's 1998 decision to largely seal off its own native forests has simply resulted in huge illegal logging elsewhere.

"China's growing demand has boosted the illegal log trade across the world," said Shi Kunshan, a researcher with Chinese Academy of Forestry.

"In the past, we imported any logs with no regard to where they came from and whether they were legal or not. Now, because of mounting international pressure, we need to exert stricter controls."

Mr Brady, however, says that while this is the optimum policy, China does not yet have a tracking system in place for log imports to enforce restrictions. "They just take whatever is brought in from overseas," he said.

Mr Sun, the importer, dismisses out of hand any concerns about sustainable supplies, saying the last time he flew over Russia, he saw nothing but native forests stretching out below him.

He recently secured his own concessions in Russia and is establishing a timber processing plant nearby. No environmentalist, Mr Sun is scathing about the logging restrictions in China and the Forestry Ministry's role in the industry. "They used to log trees. Now they just plant trees," he says sardonically. "They should be called the bureau of tree-planting."

In the short-term, industry analysts say China will struggle to maintain the double-digit growth rates of recent years because of the supply and pricing pressures.

But if its economy continues to grow, demand will soar along with it, especially from the local construction industry.

Partially as a result of lobbying by exporters such as Canada, China is changing its building code to allow more wood to be used for frames in housing construction, in place of steel.

Even without huge margins, Mr Sun plans to maintain and even increase his output, to keep his market share, and will keep his processing plants operating seven days a week, on two and sometimes three shifts.

"We are a private company," he says. "We don't have Sundays."


Chinese firms build stakes in Australian mines.

Metal firms go to source to secure future raw material supplies
602 words
23 September 2005
Lloyd's List
(c) 2005 Informa UK Ltd

Chinese metals companies such as Beijing Shougang Co are in talks to spend as much as A$10bn (US$8bn) on Australian mines to secure supplies of raw materials to feed China’s surging demand, Bloomberg reports .

The planned acquisitions could increase total Chinese investment in Australian projects sixfold in three to five years, said Henry Wang, senior investment commissioner for Greater China at government agency Invest Australia.

Commodity prices have risen to all-time highs because global mining companies such as BHP Billiton cannot keep up with China’s demand for materials to feed mills, building sites and car plants. As competition for minerals increases steelmakers and traders including Beijing Shougang and Sinosteel are going to the source to ensure they have enough iron ore and coal.

Overseas investment is “necessary and natural for Chinese producers because the country is short of natural resources”, said Lin Hai, who helps to manage the equivalent of $1.8bn for Guotai Asset Management Co, including shares in Baoshan Iron & Steel. “With these investments they can lower costs and take pre-emptive rights on the raw materials.”

Half of the proposed Chinese investments are in iron ore, 30% in coal and the rest in natural gas and other metals, said Mr Wang.

Australia, the world’s biggest coal and iron ore supplier, garnered A$1.6bn of investment from China by the end of last year.

Beijing Shougang, the publicly traded unit of China’s fourth biggest steelmaker, will pay A$120m for a 50% stake in Mt Gibson Iron’s A$722m ore project in Western Australia, subject to a feasibility study, said Mt Gibson finance director Alan Rule.

“We definitely need to invest in overseas iron ore projects so we can secure a steady raw material supply for our plants,” said Liu Anshan, a spokeswoman at Shougang’s mining resources unit.

In 2001, Baosteel invested $30m in the Eastern Ranges iron ore mine in Western Australia, partnering Rio Tinto.

China wants to “control the supply chain”, said Mr Wang at a conference organised by Metal Events of London last week. There was “an urgency for them to get into long-term contracts or be involved in directly investing”.

Australian exports of minerals and energy rose to a record A$67.4bn in the year ended June 30, boosting the local dollar by 9% in a year. Commodities account for 60% of export earnings.

Chinese companies are competing for Australia’s resources with rivals such as Posco of South Korea, Nippon Steel of Japan and Mitsubishi, which already own stakes in Australian mines.

Indian companies are also hunting for assets. Coal India, which produces 87% of the nation’s supply, is looking for stakes in Australian mines and plans this year to meet officials from Queensland state.

Chinese companies are in talks to participate in all eight new iron ore projects being developed in Western Australia, Mr Wang said. Fortescue Metals Group said this month it had held talks with investors, including steel trader Sinosteel, which in June signed a joint development with Perth company MidWest Corp.

“Of the total iron ore that China imports, China has some kind of involvement in the supplier in 25% of them,” Mr Wang said. “Chinese industry wants to increase that to 50%.”

Iron ore contract prices charged by BHP Billiton, Rio Tinto and Cia Vale do Rio Doce, which account for more than three-quarters of global ore trade, have surged 71.5% since April 1.


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