Just as China is driver for the boom, the only dampener is, surprisingly China.
We received a timely reminder yesterday of what the potential problems are.
It is growth: too much of it for the long-term (even medium-term) good of the Chinese economy.
Rapidly growing wages, stockmarket and property asset bubbles, over investment, inflation well above the 3 per cent official target level and rising.
The portents are there for China to run into some rough weather if the country’s authorities can’t bring the economy back under control and slow growth to more manageable proportions.
Figures out Thursday night show that growth in China in the first quarter jumped to an annual rate of 11.1 per cent, up from the 10.4 per cent rate at the end of 2006.
That compared with the 10.7 per cent growth figure for all of last year. The latest figures were just under the peak of 11.5 per cent in the second quarter of 2006.
The latest growth figures are clearly unsustainable and came despite the forecast from the Government in January of growth being wound back to 8 per cent this year.
For that to happen, the Chinese government would have to engineer a sharp and nasty slowdown to an annual growth rate of 5-7 per cent by the end of the year: that would cause an enormous dislocation and sell-off in stock markets and impact on that all that liquidity sloshing around.
The figures were released after Chinese stockmarkets had closed the Chinese Government knows the sensitivity of the growth figures) but China’s stockmarket fell five per cent before the markets closed in anticipation of the release of the figures.
So don’t be surprised if there’s a wobble on stockmarkets in Asia and elsewhere today and for a few days because the thinking now isfor more interest rate increases and another tightening in credit controls.
Interest rates have risen four times in around a year for no impact and credit controls (through a system of reserve deposits banks must hold and not lend) have risen six times.
That’s worrying is that Chinese wages are rising at 15 per cent a year and inflation is now running at 3.3 per cent because food prices rose in the third quarter. Core prices though were steady.
Another concern was that fixed-asset investment countrywide grew a robust 23.7 per cent; that is a big part of the problem; easy credit and plenty of money is still allowing companies to make speculative investments in new capacity.
The latest figures showed for example that in capital/energy-intensive industries, rolled steel production was up year-on-year 26 per cent; alumina 54 per cent and aluminium 43 per cent.
China’s steel capacity is now 10 per cent more than the market. No wonder the likes of Rio and BHP Billiton can ship as much iron ore as possible but will it last?
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It is no wonder Rio Tinto is expanding its West Australian iron ore operations in what is its biggest capital spending project.
China can’t get enough of the commodity, South Korea and Japanese steel mills want more, as are customers elsewhere. Only the company’s copper business gets the sort of earnings surge that iron ore does.
So with reasonably good weather in the first quarter (only three cyclones this year, one serious) Rio Tinto yesterday reported a 12 per cent rise in iron ore production.
The country’s second biggest miner said the increase in its share of iron ore production, to 32.245 million tones was due to the $US5 billion ($A6 billion) expansion program in WA.
But the company said there had been some impact on the first quarter from cyclones, but obviously nothing like the early months of 2006 when ports were shut and ships delayed for days.
Compared with the same period in 2006, Hamersley Iron production was up 17 per cent, however it was down three per cent on the previous quarter. This was in part due to a 17 day planned shutdown at the Tom Price mine to complete the major upgrade associated with the brownfields expansion.
The ramp-up is now proceeding smoothly and on schedule. Capacity expansions progressed largely on time and within budget during the quarter.
Production at Robe River’s West Angelas mine was up 25 per cent on the first quarter of 2006 and four per cent on the previous quarter.
Pannawonica production was down five per cent on the same period last year but down 23 per cent compared with the previous quarter due to the cyclone impacts. Robe River subsequently declared force majeure on some deliveries.
In February, a $860 million (Rio Tinto share $456 million) Cape Lambert port expansion was announced, increasing rated annual port capacity from 55 to 80 million tonnes.
At the completion of the project in early 2009, the combined Hamersley Iron and Robe River mine capacities will be matched to their respective infrastructure capacities.
HIsmelt produced 21,400 tonnes of pig iron during the quarter. As ramp-up continues, peak hot metal production achieved for a shift was 67 per cent of nameplate capacity.
The company said copper production fell to 197,900 tonnes due to lower grades and recoveries at Kennecott Utah Copper, but refined copper production rose 19 per cent to 101,600 tonnes, thanks to the Escondida leach plant in Chile.
“The Kennecott Utah Copper smelter operated at targeted levels during the quarter, following the scheduled maintenance shut-down in the fourth quarter of 2006,” Rio Tinto said.
Aluminium metal output rose two per cent, compared to the first quarter of 2006, to 211,700 tonnes, while alumina dropped 15 per cent to 661,000 tonnes.
“First quarter production from the Yarwun alumina refinery was 15 per cent higher than the first quarter of 2006 in line with the ramp up to full capacity but was 18 per cent lower than the previous quarter, attributable to maintenance shutdowns in February,” Rio Tinto
