Chinese economic
growth and the
demand for metals
China and the world economy
Roberto Castello Branco
EPGE, March 2011
1
Agenda

Growth skepticism

Chinese role in the global metals markets

Are commodity exporters doomed to poverty?
2
Growth skepticism
3
The Asian growth path showed a sharp
contrast with the experience of
developed nations
Real per capita GDP growth – developed economies
550
500
450
index
400
350
300
250
200
150
100
50
1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950
Source: Angus Maddison, “Countours of the world economy, 1-2030 AD”, Oxford University Press, 2007
4
Since the second half of the 20th century Asian
economies have experienced unprecedented
growth rates
Real per capita GDP
1,100
China
1,000
Korea
900
800
Taiwan
index
700
Japan
600
500
400
300
200
100
0
t
t+5
t + 10
t + 15
t + 20
t + 25
t + 30
years after the start of growth acceleration
Sources: Vale and Penn World Tables
5
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
1
1978-2007
1965-1994
3 1950-1979
4 1820-1950
Sources: Vale and Penn World Tables
2
6
Gross enrollment rates in China
Primary
school
Secondary
school
Tertiary
school
1980
113
46
2
2006
111
76
19¹
¹ 2005
Sources: US NCES and UNESCO
7
Sources of China’s growth
%
Output
Contribution of total
factor productivity
1978-2004
9.3
3.8
1978-1993
8.9
3.6
1993-2004
9.7
4.0
Source: “Accounting for growth: comparing China and India”, B. Bosworth and
S. Collins, NBER working paper 12943, February 2007.
8
Chinese role in the global
metals markets
9
Vale is one of the largest companies in the
world
Vale position in the FT 500 ranking¹
500
400
300
200
100
1
18
February 28, 2011
2010
2009
2008
¹ Ranking of the 500 largest companies in the world by market cap –
2007
Financial Times, position on 31 March of each year
20
42
25
74
2006 117
2002
446
2003
334
2004 275
2005 153
10
A global company, with offices and
operations on all continents…
Vale in 2011
11
... and a global base of world-class
assets
Asset base
by geography
Asset portfolio
Iron ore &
pellets
Asia
10%
Australasia
10%
Other
1%
Manganese
&
ferroalloys
Nickel,
cobalt &
PGMs
North
America
25%
Potash &
phosphates
Coal
Brazil
54%
Copper
Logistics
12
A large exposure to Asia: major
operations and offices in the Asia Pacific
13
Supporting Asian growth
Revenues
2002
US$ 4.3 billion
2010
US$ 46.5 billion
China
7.7%
China
33.1%
Asia
26.6%
Asia
53.3%
14
We are the only company in the
Americas listed on a major Asian
stock exchange
New York
2000
Paris
2008
Hong Kong
2010
São Paulo
1943
¹ with the listing in Hong Kong.
15
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
70
60
50
40
30
20
10
US
China
2008
2001
1994
1987
1980
1973
1966
1959
1952
1945
1938
1931
1924
1917
1910
1903
0
Source: World Steel Association, IMF, USGS and Vale
16
China’s consumption intensity of
base metals has surpassed
developed economies
Copper consumption intensity
Nickel consumption intensity
kilos / US$ 1,000 of real GDP
kilos / US$ 1,000 of real GDP
900
70
800
60
700
50
600
40
500
400
30
300
20
Developed economies
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
1999
2009
2007
2005
2003
2001
1999
1997
1995
0
Source: World Steel Association, WBMS, IMF and Vale
China
10
1998
Developed economies
1997
100
1996
China
1995
200
17
As a consequence, China has become
the number one consumer of industrial
metals in the world
Share of China in global consumption of metals
%
70
60
Iron Ore
50
Steel
Nickel
40
Copper
30
20
10
Source: World Steel Association, WBMS, IMF and Vale
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
18
Strong Chinese demand expansion has
been the main factor underlying the
sharp rise in base metals prices
5,000
LMEX index¹
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
0
¹ LME base metals prices index, includes: copper, aluminum, nickel, zinc, tin and lead
Sources: Vale and Reuters Ecowin
19
The increase in relative scarcity is
driving the upward long-term trend for
iron ore prices
1900 - 2009
5.0
Real iron ore prices
Long-term trend
log scale, real US$/ton¹
4.5
4.0
3.5
3.0
1909
1919
1929
1939
¹ prices in 2009 US$/ton, deflated by the CPI.
Sources: USGS and Vale
1949
1959
1969
1979
1989
1999
2009
20
Despite Chinese efforts to boost iron
ore output, it is increasingly dependent
on imports
Chinese dependency
on imported iron ore
Share in global iron
ore seaborne trade
70%
0.7
0.6
0.62
60%
0.5
50%
0.4
40%
0.3
30%
0.2
20%
0.1
10%
0
1985
1990
1995
Source: World Steel and Vale
2000
2005
2010
0%
1990
Japan
1995
Germany
2000
China
2005
2010
21
In the past, in a less liquid world, Japan
played the dual role of being the demand
driver and financier of mining

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.
22
Lessons from the Japanese experience

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.
23
Africa is the new mining frontier
World nonferrous exploration budget
Rest of world
17%
Canada
16%
Latin America
26%
Africa
15%
Southeast Asia
6%
Source: Metals Economics Group, 2010.
USA
7%
Australia
13%
24
Are commodity exporters
doomed to poverty?
25
The strong global demand growth for
commodities caused significant gains
in terms of trade for Brazil
180
170
index, 1990 = 100
160
150
140
130
120
110
100
90
2011
2008
2005
2002
1999
1996
1993
1990
80
Source: Funcex
26
Commodity exporters can be rich
Commodities and economic development
US Australia Canada
(A) Commodity exports¹ - US$ billion
New
Zealand
Norway Chile
Brazil
308.2
128.2
175.9
17.6
93.1
34.1
83.0
1,068.5
195.5
324.2
24.8
120.1
53.8
153.0
14,119.1
994.3
1,336.1
117.8
(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
100.0
87.1
85.7
60.2
118.4
47.3
22.1
(B) Total exports ¹ - US$ billion
(C) GDP¹ - US$ billion
Real per capita GDP relative to the US,
2007 - %
¹ 2009
Sources: IMF, Haver Analytics, PennWorld tables, MIDC-SECEX, StatCan, Statistics Norway.
378.6 161.7 1,574.0
27
Natural resources and economic growth

Investment in human capital and infrastructure.

Quality of institutions.

Policies stimulative of private sector investment.

Flexible exchange rate regime.

Countercyclical fiscal policies.
28
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29