The China factor
	China is an increasingly important driver of many commodity markets, fuelled by strong materials-intensive growth over the last decade or more. Citigroup notes that the Chinese contribution to global economic growth and commodities consumption has been dramatic: China accounts for 4% of global GDP on an exchange rate basis It accounts for 13% of world GDP on a purchasing power parity basis, up from 9% in 1995 It accounts for 12% of world industrial production, up from 6% in 1995. China also accounted for some 16% of global demand for commodities in 2003. Its share of world market demand for individual commodities such as steel was 27%, for iron ore 29% and for zinc 21%. It is a major importer of raw materials, to such an extent that demand from China played a major role in the dramatic rise of global dry bulk freight rates in 2003 and 2004.
	Strong increases in raw materials demand throughout China also exposed inadequacies in the country’s transport and energy infrastructure in 2003 and 2004. Bottlenecks resulted in production being periodically constrained in a wide spectrum of industries. However, accelerated investment in new capacity should see these problems resolved by 2006 or 2007.
	The dependence of China on imported raw materials has resulted in the government encouraging large Chinese companies to invest in foreign resource concerns to secure a steady supply of natural resources.
	It is estimated that real GDP growth in China was some 9,5% in 2004, driven to a large extent by fixed investment expenditure. The investment-GDP ratio was 43% in 2003, which is not sustainable. A major platform for the high investment rate is the fact that China has the capacity to build industrial plants at a capital cost estimated to be 30 – 40% lower than western counterparts.
	To prevent overheating of the economy, and to curb investment spending, the Chinese authorities employed various measures in 2004, including administrative controls and monetary and fiscal instruments. These measures are expected to lead to a moderate and controlled deceleration in growth in the next few years, to about 7,5% per annum. A rate of 7% per annum is viewed as the minimum required by the Chinese government to achieve its economic and social objectives.
	A slowdown in investment expenditure growth will probably have an adverse impact on commodity demand, and some signs of this were already in evidence in late 2004 when, for example, China became a net exporter of steel as the increase in domestic consumption decelerated. Preliminary statistics indicate that steel consumption in that country rose by 10,8% in 2004, compared to growth rates above 20% in the previous three years.
	The Chinese contribution to global economic growth and commodities consumption has been dramatic.
	The Chinese contribution to global economic growth has been spectacular
	It is widely expected that, over time, the commodity intensity of China’s GDP will fall. Nevertheless, even a halving of consumption growth from rates of more than 20% per annum would still leave a healthy, and more sustainable, rate of expansion in commodity demand.
	The intensity of use of metals and minerals in China lags far behind those of the developed economies of the world and, especially, those of the newly-industrialised economies, such as Korea and Taiwan. It is, therefore, possible that strong growth in commodity consumption could be sustained, albeit at rates somewhat lower than those experienced during the last few years.
	Mineral demand in China is extremely important to Kumba, both directly and indirectly. Directly, about 40% of Kumba’s iron ore exports went to that country in 2004. Some 87% of the worldwide increase in iron ore imports in 2004 was due to increased consumption in China. Kumba’s iron ore exports to China started in 1989 and grew to more than 8Mt in 2004. From 1989 to 2004, more than 75Mt of iron ore has been shipped to that country. Additionally, in 1994, Kumba made an investment of US$10 million to improve port facilities at Qingdao Port in China, followed by another investment of US$3 million in 2002. These investments facilitate the logistics of the company’s imports into the county.
	Indirectly, economic growth and the concomitant increase in mineral consumption in China have led to a significant increase in international commodity prices. The country is expected to have a positive impact on commodity markets for the foreseeable future.
	Strong growth in China’s commodity consumption could be sustained, albeit at rates somewhat lower than these experienced during the last few years.
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