1
Chinese economic growth and the
demand for metals
China and the world economy
Roberto Castello Branco EPGE, March 2011
2
Growth skepticism
Chinese role in the global metals markets
Are commodity exporters doomed to poverty?
Agenda
3
Growth skepticism
4
50 100 150 200 250 300 350 400 450 500 550
1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950
index
The Asian growth path showed a sharp contrast with the experience of
developed nations
Real per capita GDP growth – developed economies
Source: Angus Maddison, “Countours of the world economy, 1-2030 AD”, Oxford University Press, 2007
5 0
100 200 300 400 500 600 700 800 900 1,000 1,100
t t + 5 t + 10 t + 15 t + 20 t + 25 t + 30
years after the start of growth acceleration
index
China Korea Taiwan Japan
Real per capita GDP
Sources: Vale and Penn World Tables
Since the second half of the 20th century Asian economies have experienced unprecedented growth rates
6
Expansion multiples of GDP
China¹ 12.5
Korea² 8.2
Taiwan² 7.8
Japan³ 6.9
Hong Kong² 6.7
Singapore² 6.6
Developed economies4 5.3
11978-2007
21965-1994
31950-1979
41820-1950
Sources: Vale and Penn World Tables
7
Gross enrollment rates in China
¹ 2005
Sources: US NCES and UNESCO
Primary Secondary Tertiary
school school school
1980 113 46 2
2006 111 76 19¹
8
Sources of China’s growth
Source: “Accounting for growth: comparing China and India”, B. Bosworth and S. Collins, NBER working paper 12943, February 2007.
Output Contribution of total factor productivity
1978-2004 9.3 3.8
1978-1993 8.9 3.6
1993-2004 9.7 4.0
%
9
Chinese role in the global metals markets
10
Vale is one of the largest companies in the world
2002 2003 2004 2005
2006
2007
February 28, 2011
Vale position in the FT 500 ranking¹
¹ Ranking of the 500 largest companies in the world by market cap – Financial Times, position on 31 March of each year
500 400 300 200 100 1
18
74
117 275 153
446 334
25 42
2008 2009
20
2010
11
Vale in 2011
A global company, with offices and operations on all continents…
12 Coal
Iron ore &
pellets
Nickel, cobalt &
PGMs
Copper
Potash &
phosphates Manganese
&
ferroalloys
Logistics Brazil
54%
North America
25%
Asia
10% Australasia 10% Other
1%
... and a global base of world-class assets
Asset base by geography
Asset portfolio
13
A large exposure to Asia: major
operations and offices in the Asia Pacific
14
Supporting Asian growth
Revenues
Asia 26.6%
China 7.7%
2002
US$ 4.3 billion
China 33.1%
Asia 53.3%
2010
US$ 46.5 billion
15
We are the only company in the Americas listed on a major Asian stock exchange
New York 2000
Paris 2008
São Paulo 1943
Hong Kong 2010
¹ with the listing in Hong Kong.
16
0 10 20 30 40 50 60 70
1903 1910 1917 1924 1931 1938 1945 1952 1959 1966 1973 1980 1987 1994 2001 2008
US China
China’s steel consumption intensity has been much higher than the US peak level not only due to accelerated growth but also due to structural characteristics
Steel consumption intensity ton / US$ 1,000 of real GDP
Source: World Steel Association, IMF, USGS and Vale
17 0
100 200 300 400 500 600 700 800 900
1995 1997 1999 2001 2003 2005 2007 2009
China
Developed economies
Copper consumption intensity kilos / US$ 1,000 of real GDP
Source: World Steel Association, WBMS, IMF and Vale
0 10 20 30 40 50 60 70
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
China
Developed economies
Nickel consumption intensity kilos / US$ 1,000 of real GDP
China’s consumption intensity of base metals has surpassed
developed economies
18 0
10 20 30 40 50 60 70
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Iron Ore Steel Nickel Copper
Share of China in global consumption of metals
%
Source: World Steel Association, WBMS, IMF and Vale
As a consequence, China has become the number one consumer of industrial metals in the world
19 0
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000
1970 1972
1974 1976
1978 1980
1982 1984
1986 1988
1990 1992
1994 1996
1998 2000
2002 2004
2006 2008
2010
LMEX index¹
¹ LME base metals prices index, includes: copper, aluminum, nickel, zinc, tin and lead Sources: Vale and Reuters Ecowin
Strong Chinese demand expansion has been the main factor underlying the
sharp rise in base metals prices
20
¹ prices in 2009 US$/ton, deflated by the CPI.
Sources: USGS and Vale 3.0
3.5 4.0 4.5 5.0
1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009
log scale, real US$/ton¹
Real iron ore prices Long-term trend
The increase in relative scarcity is
driving the upward long-term trend for iron ore prices
1900 - 2009
21
Chinese dependency on imported iron ore
Source: World Steel and Vale 0
0.1 0.2 0.3 0.4 0.5 0.6 0.7
1985 1990 1995 2000 2005 2010
0.62
Despite Chinese efforts to boost iron ore output, it is increasingly dependent on imports
0%
10%
20%
30%
40%
50%
60%
70%
1990 1995 2000 2005 2010
Japan Germany China
Share in global iron ore seaborne trade
22
Japanese trading companies acquired stakes in mining assets across the globe.
Japanese official financial institutions provided funding for project development.
Apparently, the Chinese are willing to replicate the
Japanese experience to guarantee a steady supply of raw materials.
In the past, in a less liquid world, Japan played the dual role of being the demand driver and financier of mining
23
In the past there was no financial globalization.
Different models: private sector versus state-owned companies.
The Japanese investment was not sufficient to change the long-term trend.
Lessons from the Japanese experience
24
Africa is the new mining frontier
Source: Metals Economics Group, 2010.
World nonferrous exploration budget
Southeast Asia 6%
Rest of world 17%
Latin America 26%
USA 7%
Canada 16%
Africa 15%
Australia 13%
25
Are commodity exporters doomed to poverty?
26
The strong global demand growth for commodities caused significant gains in terms of trade for Brazil
Source: Funcex
80 90 100 110 120 130 140 150 160 170 180
1990 1993 1996 1999 2002 2005 2008 2011
index, 1990 = 100
27
Commodity exporters can be rich
¹ 2009
Sources: IMF, Haver Analytics, PennWorld tables, MIDC-SECEX, StatCan, Statistics Norway.
Commodities and economic development
US Australia Canada New
Zealand Norway Chile Brazil
(A) Commodity exports¹ - US$ billion 308.2 128.2 175.9 17.6 93.1 34.1 83.0
(B) Total exports ¹ - US$ billion 1,068.5 195.5 324.2 24.8 120.1 53.8 153.0
(C) GDP¹ - US$ billion 14,119.1 994.3 1,336.1 117.8 378.6 161.7 1,574.0
(A) / (B) - % 28.8 65.6 54.3 71.0 77.5 63.4 54.2
(A) / (C) - % 2.2 12.9 13.2 15.0 24.6 21.1 5.3
Real per capita GDP relative to the US,
2007 - % 100.0 87.1 85.7 60.2 118.4 47.3 22.1
28
Investment in human capital and infrastructure.
Quality of institutions.
Policies stimulative of private sector investment.
Flexible exchange rate regime.
Countercyclical fiscal policies.
Natural resources and economic growth
29
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