By Stephen D. Simpson
Although the geographical size of China is perhaps not that
difficult for North Americans to appreciate, its population is
another matter. As China has become the second-largest economy in
the world, it has without question transformed into an enormous
force in the world's commodity markets -- so much so, in fact, that
the recent commodity supercycle is now generally seen as a
byproduct of China's emergence.
is quite large, but in many respects quite out of date. It is
difficult to find specific numbers regarding mining's contribution
to China's economy, but direct mining activities are likely not
much more than 5% of China's GDP, and the industry employs about 4%
of the country's workers. Presuming that China's mining sector
operates along similar lines to South Africa and Australia, it does
not seem unreasonable to suggest that mining-related industries
(including refining, smelting, and so on) are another 5-10% of GDP.
Approximately one-quarter of China's trade is in minerals, ores and
in natural resources, but the country has been exploiting them at
an unsustainable rate. Nevertheless, the Asian nation is a leading
producer of a whole host of minerals and metals, including
aluminum, antimony, barite, cement, coal, gold, iron, lead,
molybdenum, rare earths, salt, tin and zinc. Due to the enormous
appetite for raw materials, though, China is in the rare position
of, in many cases, being the world's leading producer of a
commodity as well as the world's leading importer.
China is the world's leading producer of iron ore and gold. Its
recent production of 1.2 billion metric tons of iron ore accounted
for a whopping 43% of the world's production (150% more than
Australia), while it holds 9% of the world's iron reserves.
Nevertheless, it is the largest iron ore importer as well, taking
52% of world exports.
Other commodities like copper and potash follow similar trends.
China is the #4 copper producer and the #5 potash producer, but
also a major importer on the global stage.
With gold, China is the #1 producer, with 13% of the world's
production against a bit less than 4% of global reserves. The
country is likewise a major producer of silver and platinum group
metals (PGMs), and the world's leading exporter of rare earth
When it comes to trade, China is the leading exporter in the
world of antimony, barite, rare earths and not much more (though it
is a major player in steel and aluminum). In contrast, despite
large amounts of annual mine production, Chinese demand exceeds
supply in minerals like chromium, cobalt, copper, iron, nickel,
PGMs and potash.
With its enormous population and economy, it is of little
surprise that China is an equally enormous
consumer of energy
. As its economy has grown, the country has found itself
increasingly in the position of being a large net importer for much
of its energy needs.
China is the world's second-largest oil consumer at nearly nine
million barrels per day, and the world's fourth-largest oil
producer at about 4.3 million barrels per day. With that sizable
gap between consumption and production (4.6 million barrels per
day), China is the world's second-largest oil importer. As time
goes on, this is likely to get worse - China's reserves rank at #13
(20.4 billion barrels), but its fields are mature and declining,
and the country is increasingly turning to more aggressive
approaches like shale oil exploration.
Natural gas is also a significant market. China is the world's
seventh-largest producer of natural gas (3.3 trillion cubic feet),
and the fifth-largest consumer (3.8 trillion cubic feet). With the
12th-largest reserves (107 trillion cubic feet), China is the
16th-largest natural gas importer, but this number could rise as
pipelines and LNG facilities come online around the world.
Last but not least is coal. It is difficult to exaggerate the
importance of coal in China. At over 3.2 billion short tons, China
is not only the largest consumer of coal in the world, but it also
consumes half of the coal supply globally. The nation is the
leading producer of coal (about 3.2 billion tons), and while the
gap between production and consumption isn't that large (114
million tons, or less than 4% of consumption), it's enough to make
China the second-largest coal importer in the world (Japan is #1
with 181 million tons). China has the third-largest coal reserves
in the world (about 13% of the global total at 128 billion tons),
but the quality of those reserves is up for debate.
While China's immense appetite for minerals ores (like copper
and iron) and energy (crude oil and coal) absolutely drives global
markets and is a worthy topic of discussion, so too is its
agricultural sector. Agriculture is a large part of the economy
(over 10% of GDP), not only from the value of products grown,
imported and exported, but also in the number of people it employs
and the extent to which it drives the economy away from the
China is the world's largest producer of rice (38% more than
India), but readers may be more surprised to learn that it's the
largest wheat producer (42% more than #2 India) and the largest
producer of fresh vegetables (almost 5x larger than #2 India). It
is also the world's second-largest corn grower (reaching about 55%
of the United States' production, but producing 3x as much as #3
Brazil) and the fourth-largest soybean producer (albeit tiny
compared to the United States, Brazil and Argentina).
In terms of trade, China is both the world's largest
agricultural exporter (in terms of total value) and the world's
second-largest importer (behind the United States). On balance, it
is a net importer of agricultural commodities. China imports a
large amount of soybeans, palm oil, cassava, corn and rapeseed,
while it is a leading exporter of garlic, apples, other fruit,
dried beans and vegetables (fresh and preserved).
Stocks/Funds To Play China's Strengths
This nation's huge influence on commodity markets moves a large
number of stocks and funds, and investors have numerous options for
playing these opportunities.
In energy, for instance, investors can buy the stocks of
producers like PetroChina (
) and CNOOC (
). On the minerals side, there are large coal producers like China
Shenhua (CSUAY.PK) and ChinaCoal (CCOZY.PK) and aluminum smelters
like Chalco (
). It is expected that Baosteel, the world's second-largest steel
producer, will at some point pursue a listing in Hong Kong and
perhaps an ADR for the United States as well. China is also a major
factor for non-Chinese companies like Vale (
), Freeport McMoRan (
) and Rio Tinto (RIO).
There are also a host of agriculture companies, including names
like Zhongpin (HOGS) and China Mengniu (CIADY.PK). Machinery
companies like Sany that are heavily leveraged to the mining
sector, and American companies like Caterpillar (CAT), Joy Global
(JOY) and Deere (DE) are expecting Chinese demand to be an
increasingly significant driver of future results.
The China ETF space is packed full of funds that invest in
virtually every major sector the nation has to offer. Some of the
most popular tickers include the China All-Cap ETF (YAO), the SPDR
S&P China ETF (GXC), and the FTSE China 25 Index Fund
Trends/Developments To Watch
Considering how China is over-producing so many minerals and
ores (that is, producing at a level that the reserves cannot
support for very many more years), it seems hard to imagine that
they will not continue to essentially set the global price for
exports of copper, coal, iron ore, bauxite, and so on. Along those
lines, producers like Rio Tinto, Peabody (BTU) and Vale have made
long-term plans predicated on ongoing (if not increasing) Chinese
demand. Likewise, China will very likely see its agricultural
imports increasing, particularly in higher-value foodstuffs like
animal protein and seafood.
But what if China's growth spurt is at an end? Some have
suggested that China's hyper-growth phase is over, and that
commodity producers have been successful in bringing additional
capacity online to absorb China's incremental demand. Although the
argument that the nation may have overbuilt some of its Eastern
cities isn't unsupported, there's a huge portion of China that
still has relatively primitive and/or inadequate infrastructure.
That argues for many years to come of major commodity production,
consumption, and importation for China and the countries that serve
that commodity food chain.
No positions at time of writing.
Here Comes The Pain