Worry over Chinese demand is overdone, Aussie analyst says

While people in the mining sector wring their hands about slowing growth in China, declining demand for base metals and collapsing prices, they’re all missing one key point, according to an Australian mining engineer, research analyst and frequent traveller to China.

The point, argues Keith Goode, managing director and founder of Eagle Research Advisory, a consulting and research analysis firm in Sydney, is that China does not include any construction activity in its gross domestic product (GDP) numbers that it undertakes outside its borders, and which is taking place on a massive scale.  

“If China uses metal that it has imported or produced from ore processed in China, and sends it overseas, it isn’t going to be reflected in China’s GDP, and hence may not have any impact on metal prices,” Goode claims. “That explains why China has not turned away any ships — everything is offloaded.”

China stockpiles the metal or concentrates for future use, he says, and benefits from the lower prices. “The stockpiles simply become low-cost, relatively cheap sources of mined ore,” he says. “From a Chinese perspective, it’s acquiring material at a significant discount.”

Beijing is quite happy to take all the metal it can get its hands on, he continues. “It doesn’t really care because it knows it will use the stockpiles eventually.”   

China’s time frames, he adds, reflected in its five-year plans, are completely different than everyone else’s, “which is something that people in the rest of the world just can’t wrap their heads around.”

Turning to China’s massive construction projects abroad, Goode points to the country’s plans to reinstall parts of the ancient silk routes by land and sea in a project it calls “One Belt, One Road (OBOR).”

OBOR involves building at least 81,000 km of rail networks in Eurasia, not to mention thousands of kilometres of roads and other infrastructure, he says. He estimates that the geographical area that OBOR covers affects 4.4 billion people, or 63% of the world’s population, 29% of the world’s economy and 24% of the world’s goods and services.

“OBOR was expected to require US$8 trillion in infrastructure, as China rebuilds the Stans [road then rail] along with Russian infrastructure [initially oil and gas pipelines], partly in return for mineral rights and resources,” he says. “Russia has allocated its poorly developed eastern regions to China for mineral exploitation, while Kazakhstan has granted many tenements in its mineralized areas.”

China is also building infrastructure across Africa. In Ethiopia, it is laying down 5,000 km of rail lines, and if the rail and rolling stock (such as locomotives and carriages) are made in China and shipped to Ethiopia, they are included in China’s gross national product, not its GDP, Goode says. China is involved in building nuclear energy projects in Kenya.

In South America, China is putting in a railway along the Pan-American Highway through Chile and Peru, while in Central and South Asia, under the Central Asia Regional Economic Cooperation program, China intends to upgrade six transportation routes through areas including Kyrgyzstan, Turkmenistan, Kazakhstan, Tajikistan, Uzbekistan, Afghanistan and Pakistan.

“All that construction is ongoing, and it’s pretty extensive,” Goode says. “People home in on China’s GDP numbers, and they’re just numbers.”