CHINA'S QUEST FOR RESOURCES
A ravenous dragon
Mar 13th 2008
From The Economist print edition
China's hunger for natural resources has set off a global commodity boom. Developed countries worry about being left high and dry, but the biggest effects will be felt in China itself, says Edward McBride
BESIDE the railroad track, between two hillocks of rust-red soil in the midst of Congo's mining belt, three Chinese labourers appear as if from nowhere. There are lots of Chinese around these days, explains one of their compatriots, Harvey Lee, who is driving through the scrub to the nearby copper plant he runs for a Canadian metals firm. On his way, he points out several rudimentary smelters. “That one”, he says, waving at a clump of corrugated-iron sheds and belching chimneys, “is owned by a man from Shanghai.” Moments later, when another ramshackle compound comes into view, he adds, “and that one belongs to two ladies from Hong Kong.” In all, he reckons, Chinese entrepreneurs have set up half of Lubumbashi's 50-odd processing plants.
All around Lubumbashi, the capital of Congo's copper-rich province of Katanga, there are signs of a sudden Chinese invasion. Chinese middlemen have begun buying ore from the area's many wildcat miners and selling it on to processing plants like Mr Lee's. Locals point out several villas in the city's leafy colonial cantonment that are occupied by mysterious Chinese businessmen. Katanga Fried Chicken, hitherto Lubumbashi's most popular restaurant, now has three busy Chinese competitors.
If all goes according to plan, these fledgling businesses will soon be overshadowed by Chinese investment on a much grander scale. In late 2007 the Congolese government announced that Chinese state-owned firms would build or refurbish various railways, roads and mines around the country at a cost of $12 billion, in exchange for the right to mine copper ore of an equivalent value. That sum is more than three times Congo's annual national budget and roughly ten times the aid that the “consultative group” of Western donors has promised the country each year until 2010. The Chinese authorities, it seems, are so anxious to obtain enough minerals to sustain their country's remarkable economic growth that they are willing to invest billions in a dirt-poor and war-torn place like Congo—billions more, in fact, than Western governments and investors combined are putting in.
And Congo is not the only beneficiary of China's hunger for natural resources. From Canada to Indonesia to Kazakhstan, Chinese firms are gobbling up oil, gas, coal and metals, or paying for the right to explore for them, or buying up firms that produce them. Ships are queuing off Australia's biggest coal port, Newcastle, to load cargoes destined for China (pictured above); at one point last June the line was 79 ships long. African and Latin American economies are growing at their fastest pace in decades, thanks in large part to heavy Chinese demand for their resources.
China's burgeoning consumption has helped push the price of all manner of fuels, metals and grains to new peaks over the past year. Even the price of shipping raw materials recently reached a record. Analysts see little prospect of an end to the boom; the prices of a few commodities have fallen on the back of America's worsening economic outlook, but others, including oil, wheat and iron ore, continue to set new records. China, with about a fifth of the world's population, now consumes half of its cement, a third of its steel and over a quarter of its aluminium. Its imports of many natural resources are growing even faster than its bounding economy. Shipments of iron ore, for example, have risen by an average of 27% a year for the past four years. Western mining firms are enjoying a sustained boom.
Unwelcome advances
But China's sudden global reach is generating as much anxiety as prosperity. In 2005 America's congressmen, citing nebulous national-security concerns, scuppered the proposed takeover of Unocal, an American oil firm, by CNOOC, a state-owned Chinese one. The opposition candidate in Zambia's presidential election in 2006 made a point of attacking the growing Chinese presence in the country. Residents of Russia's far east fear that China is planning to plunder their oil and timber and perhaps even to colonise their empty spaces.
Some non-governmental organisations worry that Chinese firms will ignore basic legal, environmental and labour standards in their rush to secure resources, leaving a trail of corruption, pollution and exploitation in their wake. Western companies fret that the Chinese state-owned firms with which they suddenly find themselves competing have an agenda beyond commercial gain. The Chinese government, they say, is willing to pay over the odds for mining or drilling rights to secure access to physical resources. It also intervenes unfairly on its companies' behalf, they claim, by offering big aid packages to countries that welcome Chinese investment. All this, it is feared, will dent the profits of big oil and mining firms, stoke inflation and imperil the West's access to resources that it needs just as much as China does.
Diplomats and pundits, for their part, fear that the West is “losing” Africa and other resource-rich regions. China's sudden prominence, according to this view, will reduce the clout of America, Europe and other rich democracies in the developing world. China will befriend ostracised regimes and encourage them to defy international norms. Corruption, economic mismanagement, repression and instability will proliferate. If this baleful influence spreads too widely, say the critics, the “Washington consensus” of economic liberalism and democracy will find itself in competition with a “Beijing consensus” of state-led development and despotism.
Such fears are not entirely groundless if the recent conduct of some of Congo's neighbours is anything to go by. Angola, to the south, has been receiving so much aid and investment from China that in 2006 it decided it had no need of the International Monetary Fund's billions and all the tiresome requirements for transparency and sound economic management that come with them. Sudan, to the north, has shrugged off Western threats and sanctions over the continuing atrocities in Darfur, thanks in large part to China's readiness to invest in Sudanese oilfields and buy their output. Farther afield, China's eagerness to do business in Myanmar, and its consequent reluctance to chide the tyrannical generals that run the place, helped to prevent a forceful international response to the violent repression of peaceful demonstrations there last year.
Nonetheless, this special report will argue that concerns about the dire consequences of China's quest for natural resources are overblown. China does indeed treat some dictators with kid gloves, but it is hardly alone in that. Its companies do not always uphold the highest standards, but again, many Western firms are no angels either. Fifty years of European and American aid have not succeeded in bringing much prosperity to Africa and other poor but resource-rich places. A different approach from China might yield better results. At the very least it will spur other donors to seek more effective methods.
For all the hue and cry, China is still just one of many countries looking for raw materials around the world. It has won most influence in countries where Western governments were conspicuous by their absence, and where few important strategic interests are at stake. Moreover, as China is becoming more involved in places such as Congo, its policies are beginning to change. It has promised to co-operate with the World Bank in its development efforts in Africa. It no longer seems prepared to back its most objectionable allies in the face of international opprobrium. Its diplomats, for example, did eventually stop parroting their line about unwarranted interference in the internal affairs of a sovereign state and allow United Nations peacekeepers to be deployed in Sudan.
The saga over Sudan shows how sensitive the Chinese authorities have become to criticism, despite their impassive reputation. When Steven Spielberg resigned as an adviser to the Beijing Olympics in protest at China's failure to do more about Darfur, a shrill chorus of criticism arose from China's official media—suggesting that such gestures do indeed have an impact.
Chinese companies will inevitably find themselves in fierce competition with Western ones for natural resources, as they must if global markets are to work efficiently. For the most part, however, they do not operate very differently from their peers. To the extent that the Chinese government does subsidise oil production, it helps to bring down the price for everyone else (its subsidies for oil consumption are another matter). As the world's biggest consumer of many commodities, China naturally wants to ensure a steady supply of them to keep its economy going. But markets for commodities are global, and the risk of any one consumer cornering supplies, or securing them at a lower price, is negligible.
Own goal
The worst fallout from China's quest for natural resources will be seen not in the countries they come from, nor in the countries that are competing for supplies, but in China itself. Over the past few years the volume of raw materials it consumes per unit of output has risen sharply. In particular, China has gone from miser to glutton in its use of energy, and is now struggling to diet. That has involved bigger imports of oil, gas and coal, and so more foreign entanglements. But it has also led to the rapid depletion of resources that China cannot import, such as clean air and water.
China is building a huge stock of grimy heavy industry, just as its coastal provinces are getting rich enough to care about the consequences. Protests about environmental issues are on the increase. There is not enough water in the Yellow River basin, which covers a huge swathe of northern China, to supply both farmers and factories. Acid rain from coal-fired power plants is reducing agricultural yields, raising the spectre of increased rural unrest. As it is, the authorities are struggling to ensure that the air will be fit for athletes to breathe at the Olympics in Beijing this summer. All the while, the number of noxious steel mills, cement kilns and power plants relentlessly increases. Global warming, which is fed by their fumes, will make all these problems even worse.
Environmental concerns are unlikely to bring down the Communist regime, or even to stir as much resentment as the arbitrary confiscation of land currently does among China's poorest. But those concerns are certainly prompting the government to reflect on what sort of economic path it wants to pursue. So far, its efforts to temper economic growth, encourage energy efficiency and wean the country off heavy industry have had little effect. But continued failure would eventually make China a less prosperous and more unstable place.
Iron rations
TO SEE just how quickly China's demand for natural resources is growing, visit Shougang Group, on the outskirts of Beijing. The story of the mill mirrors the chequered history of Chinese industry. This is one of the country's oldest firms, founded in 1919. Nationalised after the Communist takeover in 1949, it was turned into a showcase for the achievements of the People's Republic. Pictures of assorted party bigwigs donning hard hats and greeting the workers adorn the walls. During the Great Leap Forward, Zhou Enlai visited the mill to celebrate its bounding output; in the 1980s, Deng Xiaoping came as part of his drive for “socialism with Chinese characteristics”, meaning capitalism with a dose of state ownership.
In keeping with Deng's reforms, Shougang has transformed itself from a model of central planning into a cold-blooded capitalist roader. In the old days the mill was a city within a city, complete with all the frills you would expect from a workers' paradise. It still has its own newspaper and television station, and an internal bus service to ferry workers around its eight-square-kilometre compound. But the company has already shed 180,000 workers and plans to trim 60,000 more, leaving just 20,000. It has offered shares in five subsidiaries to investors on the stockmarkets in Shenzhen and Hong Kong and spent the proceeds on bigger and better facilities. Its steel has been used in many of China's best-known construction projects, including the Three Gorges dam, Beijing's curious egg-shaped opera house and a soaring suspension bridge that spans the Huangpu river in Shanghai.
At the furnaces in the centre of the compound, sparks shower down as a mechanical shovel fills a red-hot crucible with coal and iron ore; molten steel pours from another. A temperature gauge reads 1,127°C. Last year the mill turned out 8m tonnes of steel. But later this year it will close, a casualty of the drive to improve Beijing's air quality for the Olympics.
The demise of Shougang Steel's main plant, however, will not dent the firm's output for long. In conjunction with another Chinese steel firm, it is on the verge of opening an even bigger mill, on an artificial island in the Bohai Gulf in Hebei province, about 220km (140 miles) to the south-east. This will have an initial capacity of almost 10m tonnes. What with the expansion of two other mills in Hebei, Shougang is on course to increase its output from 6m tonnes in 2003 to at least 20m tonnes by 2010. A spokesman says further development is already in the works, and output might reach as much as 30m tonnes soon after. Asked whether the firm is confident that there will be a market for all this steel, he looks puzzled. China is growing so fast, he says, that there is no problem selling anything Shougang produces.
There are many more businesses making similar assumptions. Shougang ranked only ninth by output among China's steelmakers in 2006. In all, the country has 7,000 of them, 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.
Shougang, for example, 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. Its new mill is being built on the coast partly to provide easier access for such imports.
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.
Squeeze every drop
The commodity that best illustrates China's abrupt transition from exporter to importer of resources is oil. In the 1950s Mao Zedong directed his mandarins to find oil to cut China's import bill and reduce the risk of a blockade by hostile capitalists. And find it they did, in the middle of the bare steppe of the north-east, at a place called Daqing. The field turned out to be one of the world's biggest, with over 14 billion barrels of reserves.