China Demand Still Buoys Global Producers
Despite China's slowing economy, its appetite for goods and commodities from Africa to Asia are holding up
China Demand Still Buoys Global Producers - WSJ.com
Leafy dried tobacco, stacked in a Zimbabwe auction hall, offers a glimpse of how China's resilient global demand has spared many suppliers—even as investors flee emerging markets on fears of the Asian giant's ebbing appetite.
Last year, Zimbabwe auctioned off one-third of its tobacco crop to its biggest customer, China, bringing in about $700 million overall to the cash-starved southern African economy. This month, the government is opening its annual tobacco auctions earlier than usual, anticipating that an even larger crop and sustained Chinese demand will earn it as much as $1 billion, said Zimbabwe's Tobacco Industry & Marketing Board.
"When times are great people smoke more. When times are difficult people smoke more," said Adam Molai, executive chairman of Savanna Tobacco, a Zimbabwean cigarette maker. "There are a lot of people in China to smoke more."
From southern Africa to southern Asia, investors have soured on many commodity-rich emerging markets boosted in the past by China's ravenous appetite for what is grown from the soil or extracted from the mines. But so far, a slowing China hasn't hurt its suppliers much.
That is because massive Chinese demand hasn't significantly weakened and many emerging economies now have their own consumers to help pick up any slack. The global market jitters, economists and executives say, reflect less an actual falloff in China's appetite and more a bet that China's growth will continue to taper off.
"People are mistaking slowing headline growth with the real impact of GDP. It's not game over," said Charles Robertson, chief economist for investment bank Renaissance Capital. "The Chinese growth story is still decent even if the percentage number is slower."
As investors have fled emerging markets around the world recently—also spurted on by the U.S. Federal Reserve's diminished bond-buying program—they have punished some vital Chinese suppliers, such as Indonesia and South Africa. Their currencies, the rupiah and the rand, have lost a quarter of their value against the U.S. dollar in the past year.
Investors are worried China's slower growth will sap demand for Indonesia's coal, nickel and rubber and South Africa's chromium, manganese and platinum.
China's economy is indeed cooling. The economy expanded 7.7% last year, the government said, the same rate as 2012 and down from 9.3% in 2011. Some analysts are ratcheting back growth forecasts for 2014 to the low 7%s, believing the government could tighten interest rates to check rising debt.
And the rush to produce for China's economy has created more supply, such as new iron-ore mines in Australia and big nickel expansions in Indonesia. That new supply is also weighing on prices. The value for iron ore, copper and nickel has fallen.
The prospect for sluggish Chinese car sales, fewer new apartment buildings and diminished appetite for gadgets could further soften metals demand.
So far, though, demand for metals and minerals generally has held up—despite the slightly slower Chinese growth rates. China's iron-ore imports totaled 73.4 million tons in December, close to the record a month earlier and up almost a fifth from the beginning of 2013.
Thanks in part to demand for its minerals and base metals, South Africa's trade balance swung to a surplus in November on increased exports to Asia and Africa, and widened further in December. Africa's trade with China rose to $210 billion last year, a 6% increase over 2012, according to South Africa's Standard Bank.
"The narrative that suggests a slowing China completely erodes its ties with Africa is flawed," said Simon Freemantle, a Standard Bank economist. "China's appetite for African commodities is robust."
China's economy—now second largest after the U.S.—won't be sated for years to come, said Nev Power, chief executive of Fortescue Metals Group Ltd FMG.AU +1.24% , an Australian iron-ore miner. He sees continued migration to the cities from China's still densely populated countryside fueling demand new infrastructure, factories and housing to accommodate the rural arrivals.
"There is never any shortage of bears on China, but you can only look at what has actually happened to date," Mr. Power said.
That thinking has led some corporate boardrooms to defy market signals. Australia-based Rio Tinto, one of the world's largest producers of iron ore, is planning to increase production by nearly a quarter by 2017, based largely on its outlook for China. It estimates Chinese demand for steel rose 7.5% last year compared with 2.2% the year earlier.
China isn't cutting back on mineral-rich Africa, either. In September, state-owned China Power Investment Corp. signed a $6 billion deal to mine bauxite in Guinea, which holds up to half of the world's reserves of the aluminum ingredient.
Daniel Tirta Kristiadi, chief operating officer of PT Kirana Megatara, an Indonesian rubber exporter, is less optimistic that China's auto industry can keep pace amid the country's slowing overall growth. "Eventually it will reduce demand for rubber," he said.
China's car demand has fueled demand for crude oil in Africa, as tens of millions of Chinese citizens adopt trappings of a middle-class lifestyle.
The same dynamic, rising consumer demand in Africa, is helping parts of the continent prepare for slowing growth in China.
Angola, Africa's second-biggest oil producer, sells 40% of the 1.8 million barrels it pumps every day to China. Officials say steady demand will push production up 10% by next year. But a nascent Angolan consumer class is helping drive economic growth in the country that the International Monetary Fund says will reach 6.3% this year, up from 5.6% in 2012.
"People have aspirations, and some spending money," said Gustavo Fontes, Angola director for the Brazilian conglomerate Odebrecht SA, which recently opened a chain of 31 supermarkets to reach those new consumers.
Further north, the West African nation of Ghana is looking forward to years of rising demand for its critical cocoa crop as China develops a taste for chocolate, said Lauren Bandy, an analyst at market-research firm Euromonitor International. Global demand that includes a 5% annual increase from China will outstrip supply at least through 2018, the firm estimates.
"Demand from China has completely taken off," Ms. Bandy said.
It is that supply-demand mismatch that sent Richard Tsorblewu driving through the rain one recent Friday, buying cocoa from farms along the hills of Ghana. With prices at a 2½-year high, Mr. Tsorblewu, a trader, has been loading up truckloads of cocoa, and even cosigning loans for farmers looking to buy fertilizer.
"It's China," he said. "They like chocolate very well."
