Presented by Chris Caton

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China, Commodities, Australia etc

• Presented by Chris Caton
• November 2006

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Topics Covered

• The Developing World is Becoming So Much More
  Important

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Global growth is being increasingly driven by
developing economies
Real GDP growth 1970-2008
Advanced economies
Advanced economies comprise the US, Western
Europe, Japan, Canada, Australia and New Zealand.
Sources IMF, World Economic Outlook September
2006 database Economics_at_ANZ.
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which now account for just over 50 of world GDP
and over 60 of the growth in the world GDP
Shares of world GDP
Advanced economies comprise the US, Western
Europe, Japan, Canada, Australia and New Zealand
Sources IMF, World Economic Outlook Angus
Maddison, The World Economy Historical
Statistics Economics_at_ANZ.
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China and India are reclaiming their historical
position as the worlds largest economies
Shares of world GDP, 0 2015 AD
Source Angus Maddison, The World Economy A
Millennial Perspective, OECD Development Centre,
2001 IMF, World Economic Outlook Database,
September 2005 Consensus Economics, Consensus
Forecasts, October 2005 Economics_at_ANZ.
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Source Treasury
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The world economy in ten years time
GDP growth,
 GDP in 2015
GDP in 2015

  GDP in 2005
GDP in 2005
 
Rank
USbn
2006-2015 (f)
Rank
USbn
 
3.1
1
12,278
United States
2
16,800
8.0
2
9,412
China
1
20,650
1.6
3
3,911
Japan
4
4,600
6.5
4
3,633
India
3
6,600
1.5
5
2,522
Germany
5
2,900
2.3
6
1,833
United Kingdom
7
2,300
2.1
6
1,830
France
8
2,250
1.5
8
1,668
Italy
10
1,950
3.6
9
1,576
Brazil
8
2,225
5.5
9
1,577
Russia
6
2,700
2.7
11
1,105
Canada
14
1,450
12
3.7
12
1,073
Mexico
1,550
12
4.6
13
994
Korea
1,550
11
5.9
14
977
Indonesia
1,750
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3.3
17
630
Australia
875
Note GDP figures are converted to US at
purchasing power parities (PPPs), not market
exchange rates. Forecasts are consensus
forecasts Sources IMF, World Economic Outlook
September 2006 Consensus Economics, Consensus
Forecasts April 2006 ANZ.
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Topics Covered

• The Developing World is Becoming So Much More
  Important
• Some Aspects of Chinas Growth

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Chinas growth has accelerated in the first half
of 2006 despite official plans to slow it down
Retail sales
Real GDP
Industrial production
Fixed asset investment
Source China National Statistics Bureau
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Modest tightening measures by the Peoples Bank
of China havent succeeded in reining in lending
Interest rates
Bank lending
Money supply growth
Construction loans
Source Peoples Bank of China.
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Topics Covered

• The Developing World is Becoming So Much More
  Important
• Some Aspects of Chinas Growth
• Trade Issues

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Two sides of the same coin?
US, current account balance, USbn
China, current account balance, USbn
Source CEIC, Macquarie Research, September 2006
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China gains share in US imports
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The importance of the US consumer
US imports from China, USbn

• China has been diversifying to capital goods and
  Europe
• But the US consumer still buys 18 of Chinas
  exports

Source CEIC, Macquarie Research, September 2006
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The importance of raw US demand
US imports from China, change, USbn

• In the 01 downturn, market share gains offset
  demand losses
• But China is now showing signs of market share
  saturation
• China already has nearly 50 of US computer
  import market

Source CEIC, Macquarie Research, September 2006
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US slowdown would slow imports too
China imports, USbn

• It is the trade surplus, not exports, that
  matters for GDP directly
• But slowing export growth would dampen import
  growth too
• Processing volumes would change, and perhaps raw
  material prices

Source CEIC, Macquarie Research, September 2006
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Topics Covered

• The Developing World is Becoming So Much More
  Important
• Some Aspects of Chinas Growth
• Trade Issues
• China and Commodities

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Source Treasury
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China is now the major influence on global demand
for base metals and steel
pa Emerging Markets (India, Russia,
Brazil and Mexico)
Source IMF World Economic Outlook, September
2006 Table 5.3.
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Chinas impact on global steel growth
Source IISI, World Bank, Macquarie Research, May
2006
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Metal prices are at record highs in nominal terms
though below previous peaks in real terms
Nominal and real metal prices
Source IMF International Financial
Statistics Economics_at_ANZ.
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A long-term look at prices
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Per capita consumption of base metals and steel
typically rises with income up to US 15-20,000
Sources IMF World Economic Outlook September
2006 (Figure 5.7) Economics_at_ANZ.
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Base metal consumption in developing countries is
likely to grow strongly over time
Base metal consumption and GDP per capita, 2004
Sources ABARE Australian Commodities 2006 IMF
World Economic Outlook September 2006
Economics_at_ANZ.
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Developing country demand for oil is likely to
grow rapidly as incomes rise
Oil consumption and GDP per capita, 2005
Sources The Economist Survey of the World
Economy 16 September 2006 p. 20 BP Statistical
Review of World Energy 2005 IMF World Economic
Outlook September 2006 Economics_at_ANZ.
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Chinas share of commodities demand continues to
soar

• China has gone from 710 of world demand for the
  main base metals in 1993 to 2025 of world
  demand in 2003.
• Even allowing for a slowdown from current growth
  rates, China is likely to account for 30 of
  world demand by 2010.

Source Macquarie Research, August 2006
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Metal supply has responded more slowly to the
acceleration in demand than in earlier cycles

• Mining companies have to some extent been
  surprised at the strength of the upturn in demand
• industry views on the outlook for prices were
  generally pessimistic in the aftermath of the
  Asian economic crisis
• The mining industry globally is more consolidated
  than in previous cycles
• companies are more conscious of the impact that
  an increase in their own production may have on
  prices
• Mining companies now have alternative ways of
  spending windfall cash flows
• expanding exploration or production is no longer
  the first instinct
• takeovers, special dividends and share buybacks
  are now much more common-place among mining
  companies

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Nickel and copper prices are now very high
relative to production costs should prompt
increased supply
Ratio of price to cash operating cost of least
efficient 10 of producers selected base metals
Sources Brooke Hunt Metal Consultants
International Monetary Fund World Economic
Outlook September 2006 Table 5.5.
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Modest increases in global production of most
major mineral commodities now in prospect
Average annual rate. Sources ABARE,
Australian Commodities September quarter 2006
Economics_at_ ANZ.
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Topics Covered

• The Developing World is Becoming So Much More
  Important
• Some Aspects of Chinas Growth
• Trade Issues
• China and Commodities
• China and Australia

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Chinas rapid growth and industrialization is
particularly and uniquely Good Thing for
Australia
Long-term price changes for Australian exports
and imports
Ratio of Australian export prices to import
prices
Note the terms of trade is the ratio of export
to import prices it is a measure of the
international purchasing power of Australias
exports. Sources ABS US BEA Economics_at_ANZ.
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Terms of trade gains since 1999 have been worth
2,844 pa to each Australian, on average
Real gross domestic product and income
Real gross domestic product and income per capita
Note Gross domestic income (GDI) is GDP adjusted
for changes in the terms of trade (ratio of
export to import prices). Sources ABS
Economics_at_ANZ.
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Higher commodity prices have prompted a surge in
resources-related investment
Capital expenditure by the mining industry
Export-oriented infrastructure investment
Sources ABS Economics_at_ANZ.
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The Australian resources sector is booming on all
fronts except surprisingly - output
Capital expenditures
Employment
Gross value added
Pre-tax profits
Source ABS.
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Its inevitable that different States will grow
at different speeds
Mining and manufacturing as a share of State
economies
Sources ABS Economics_at_ANZ.
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RBA Non-Rural Commodity Prices and the AUD/USD
AUD/USD
index
240.0
1.60
RBA Non-Rural Commodity Price Index (US terms)
(LHS)
216.0
1.44
192.0
1.28
168.0
1.12
144.0
0.96
120.0
0.80
96.0
0.64
AUD/USD (RHS)
72.0
0.48
85
87
89
91
93
95
97
99
01
03
05
Source ABS
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Summary

• Global growth is now being driven by developing
  economies especially but not only China
• Although commodity demand from advanced economies
  has begun to ease (with a slowing in the US),
  developing countries energy and metals demand is
  likely to continue growing strongly
• The surge in energy and metals prices reflects
  the muted response of commodity supply to the
  rapid growth in demand
• in turn partly as a result of changes in the
  structure of the global resources industry
• Prices of most resource commodities will ease
  from current highs but remain high by the
  standards of the past decade
• The current resources boom is allowing
  Australia to maintain reasonably strong economic
  growth in contrast to other countries where
  growth has been largely dependent on consumer
  spending fuelled by a now-passed housing boom
• The two-speed pattern of growth in the
  Australian economy is not unusual
• what is unusual (and behind the focus on this
  issue) is that New South Wales is at the bottom
  of the pack

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performance.
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Topics Covered

• The Developing World is Becoming So Much More
  Important