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China's grand expansion

By Arthur Thomas - posted Wednesday, 17 March 2010


Pricing

Imported ore prices rose 38 per cent in 2009, with a further minimum 50 per cent increase likely for 2010-2011.

Sole responsibility for the 2009 price rise lay squarely with Beijing and CISA. Rejecting the contract price, agreed to by the global steel majors, China's mills had to buy on the higher price spot market.

The looming problem for China is Beijing's rigid command economy mentality that refuses to adapt to a free market global economy and attempts to impose its will on that market by direct involvement in negotiations. Beijing's frantic manoeuvring and posturing on iron ore pricing however, has far greater and urgent implications for the steel industry and the economy.

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China failed to factor in rising iron ore prices, and because of the massive content of steel in the stimulus package, Beijing is facing a major blowout in stimulus spending, and the economy's rising debt load. The CCP cannot cut back without losing considerable face and has no option but to fund the program from all available sources.

Cutting back will hit the steel industry, steel producing provinces, and especially local and national GDP, and unemployment. Resolving the problem of serious civil unrest by redundant workers will come with a large price tag or increasing violence.

Cuts will create a ripple effect on the coal and energy producing industries and regional bases. But without cuts debt will continue to mount and property values will decline.

While there is growing debate as to China's overcapacity in 2010, the reality of that overcapacity will become apparent at the end of 2010 when the stimulus projects are completed. China will then need buyers for what will be a major steel capacity surplus and a sudden decline in the driver of its steel industry, China's own domestic demand.

Steel exports

It is not only spiralling domestic demand for steel that is driving iron ore imports. Official statistics report rising exports for China's steel despite tariffs from the US and Europe for products that included oil drilling pipe driven by rising exploration and development.

Scrutiny of those exports, however, reveals that they form a critical and valued component of China's aid programs in client states that range from neighbouring Asian countries in the South, to Russia and North Korea in the north; west to Central Asia and the Middle East; south into Africa and across the oceans to the south Americas.

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Aid, grants and low interest loans fund the programs that include government buildings, airports, shipping facilities, customs security systems, railways, mining, highways, oil and gas development, as well as military hardware

Railways

In fulfilling Sun Yat-Sen's vision of "The International Development of China," the CCP created the most ambitious railway expansion program in history: it is a major consumer of China's steel.

In Tibet, the new railway is extending westwards, southwards and eastwards. And a major upgrade and expansion in Xinjiang is connecting China's vast rail network throughout central Asia and on into the Middle East and Western Europe.

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About the Author

Arthur Thomas is retired. He has extensive experience in the old Soviet, the new Russia, China, Central Asia and South East Asia.

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All articles by Arthur Thomas

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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