China's Oil Appetite
By Dean Calbreath San Diego Union Tribune March 21, 2005
SHANGHAI, China – From the Cloud 9 bar atop the world's highest hotel, a visitor can get a bird's-eye view of the world's largest construction boom, which has fueled price increases and market disruptions around the globe.
Just 15 years ago, the Pudong area of Shanghai consisted of little more than dilapidated housing and muddy patches of ox-plowed farmland. Now it looks like downtown Manhattan.
From Cloud 9's windows on the 87th floor, visitors can pick out some of Pudong's more flamboyant buildings: the Oriental Pearl, Asia's tallest TV tower, which is studded with glass spheres that house stores, restaurants and museums; the sprawling Opera House, with separate venues for folk music, Chinese opera, classical music and Western opera; and the Science and Technology Museum, one of the world's biggest, featuring an indoor rain forest and a 230-foot-tall geodesic dome.
And that's just one neighborhood in one Chinese city.
Each month, China needs to build the equivalent of a Houston or a Philadelphia just to keep up with population growth. Each year, Shanghai – about the geographic size of the city of San Diego but with 10 times the population – constructs or renovates 200 million square feet of building space, about the same amount as all the office space in New Jersey.
To fuel that boom, and to feed its hungry factories, China uses more than two-fifths of the world's annual output of cement, one-third of its iron ore, one-quarter of its lead and steel, and more than one-fifth of its copper, aluminum and zinc.
The country's unprecedented demand for raw materials has had far-reaching effects, helping drive up the price of raw materials last year and creating short-term shortages throughout the world.
When victims of the 2003 San Diego County wildfires tried to rebuild their homes, some were told the price of wood had risen because of demand from China. And when the Sweetwater School District in Chula Vista wanted to repair some of its facilities last year, it had a hard time finding cheap concrete because so much was being used by China.
"A number of factors affected construction costs and timelines, but not the least was the tremendous demand for concrete and steel from China," said Bruce Husson, Sweetwater's chief operating officer.
Partly because of the price increases in raw materials, Husson said, some contractors submitted bids last year for almost twice what the projects were budgeted for.
"We had to slow down a number of (contract) awards because we couldn't afford such exorbitant prices," he said.
To most consumers, perhaps the most visible effect of China's growing demand is the recent rise in worldwide oil prices, as an ever-increasing number of Chinese switch from bicycles to automobiles.
More than 2 million new drivers hit the roads in China last year – helping make China the world's No. 2 consumer of oil, after the United States – and the number of new drivers is increasing at double-digit rates each year.
"The unexpected demand from China helped push crude oil prices above $50 a barrel," said Joe Sparano, president of the Western States Petroleum Association. "You have a market of 1.3 billion people that has suddenly discovered the automobile."
Although China represents only 8 percent of the world's oil demand – compared with 25 percent for the United States – its thirst is increasing exponentially and represents 50 percent of the growth in the market.
Steel and concrete
China is not the only reason for last year's shortages and price increases. War, terrorism and political disruptions helped push up the price of oil. Hurricanes and plant consolidations also put a crimp on building materials. Renewed production by North American factories chewed into metal supplies. In California, the demand for construction materials was also driven by a spate of public works projects.
Unlike one-time events that roil the marketplace, China's demand for raw materials represents a growing source of pressure that could affect commodities for decades to come.
"Over the long term, China's appetite for commodities and energy suggests that prices will rise, which will mean less spending power for the U.S. consumer and slimmer profit margins for U.S. companies," said Zachary Karabell, senior economic analyst and portfolio manager of the China-U.S. Growth Fund at Fred Alger Management.
There have been positive side effects of China's expansion. It has created a new market for suppliers of raw materials from Chile to South Africa and has breathed new life into the copper mines of Arizona, cement plants of California and steel mills of Pennsylvania.
As recently as three years ago, U.S. steel mills were in crisis, facing low-cost competition from China and other foreign locales. Some U.S. companies, led by the venerable Bethlehem Steel, filed for bankruptcy. Others shut down their mills and blast furnaces. Nationwide, steel mills were running at 78 percent capacity.
The situation was so bad that steel companies persuaded the Bush administration to go against its own laissez-faire inclinations and briefly impose trade barriers against Chinese and European steelmakers.
As China's construction boom took off over the past five years, the global steel market tightened, prices rose and steel mills in the United States revved up to 94 percent of capacity.
"In a relatively short period of time, most of the mills that had gone idle came back on line," said Nancy Gravatt, spokeswoman for the American Iron and Steel Institute. "All the steel mills were working fast and furious to meet the needs."
Thanks largely to demand from Asia, the U.S. steel mills should be humming for at least the next two years, according to a recent report from the International Iron and Steel Institute.
The cement industry saw a similar increase in demand. At the peak of the market last year, all 118 cement plants in the United States were operating at close to 100 percent capacity, and even then they could not keep up with demand. Last fall, 35 states including California were suffering cement shortages, causing delays for some construction projects, according to the Portland Cement Association.
"Last year was really a nightmare for a lot of projects," said Ben Sabati, who oversees cost control at Vanir Construction Management, a Sacramento specialist in such public projects as schools, hospitals and ports. "Many contractors couldn't get the materials they wanted."
He estimated that the cost of materials in the United States rose an average of 15 percent to 25 percent, compared with 3 percent to 5 percent in previous years. Although several factors contributed to the price increases – rising demand for steel in U.S. factories, the need for construction material after Florida's hurricanes, steel mill and cement plant closures – one of the biggest reasons was China.
"A lot of cement that the U.S. typically buys from Asia was diverted to China," Sabati said. "And China's demand for steel caused shortages in anything having to do with steel – steel structures, metal struts, sheet metal."
The shortage of materials has eased since last summer, but prices are still higher than before.
Larry Zolezzi, president of San Diego's LZ Construction, said that before the demand began rising in 2003, he could buy a yard of concrete for about $78. As demand peaked last year, the price soared well above $100. And even though prices have abated, they still range between the upper $80s and upper $90s. For some materials, such as plywood, which tripled in price last year, costs have not come down, he said.
"With all these price rises, you could easily see a 15 (percent) to 18 percent increase in the cost of a house," Zolezzi said. "When you're talking about a product worth $300,000 or $400,000, that could be a significant increase in price."
Dave Konstantin, who heads K-Co Construction in San Diego, said the continuing price increases make it hard to calculate costs when writing a contract for clients.
"The prices I quote one day don't benefit me two months later," he said. "It's very difficult to quantify beforehand how high prices are going to rise. We constantly have to raise our prices with customers to keep our profitability. It's brutal."
Cooling the boom
The Chinese government also worries that its red-hot growth rate could lead to bigger and longer-lasting worldwide price increases, sparking inflation not only in the United States and other countries, but in China itself.
To slow demand, Chinese officials have been raising interest rates, which has cooled construction a little. But foreign investment and skyrocketing exports have counteracted the government's lukewarm measures.
"Everyone knows Beijing is trying to slow things down. And everyone knows it won't succeed," said Anthony Chan, senior economist for JPMorgan Fleming Asset Management. "The bottom line is they can't slow the economy too much. They have between 70 million and 100 million people who don't have a job, so they're still under a lot of pressure to grow fast."
For America's cement and steel industries, the long-term solution is to ramp up production to meet an anticipated rise in demand. U.S. cement companies plan to expand their manufacturing capacity by 17 million tons by 2009, roughly an 18 percent increase in domestic capacity.
They will run into tough competition from China. The country already dominates the global cement landscape, accounting for 37 percent of the cement produced, followed by India and the United States. By 2006, China is expected to produce 340 million tons of crude steel a year, representing 30 percent of world production.
While China's demand for steel is increasing at 11 percent per year, production is growing at an even hotter 20 percent. That means China soon could be producing enough steel to meet its own needs and swamp the global market with cheap exports. That would lower prices for U.S. consumers – especially given the low value of the Chinese currency – but would throw the U.S. steel industry into another slowdown.
"If we get back to a situation where there's excess capacity on the market, China's low currency and the fact we have few trade barriers could once again make the U.S. an attractive place for it to dump steel," said Gravatt, the steel industry spokeswoman. "That could be our one area of vulnerability."
SHANGHAI, China – From the Cloud 9 bar atop the world's highest hotel, a visitor can get a bird's-eye view of the world's largest construction boom, which has fueled price increases and market disruptions around the globe.
Just 15 years ago, the Pudong area of Shanghai consisted of little more than dilapidated housing and muddy patches of ox-plowed farmland. Now it looks like downtown Manhattan.
From Cloud 9's windows on the 87th floor, visitors can pick out some of Pudong's more flamboyant buildings: the Oriental Pearl, Asia's tallest TV tower, which is studded with glass spheres that house stores, restaurants and museums; the sprawling Opera House, with separate venues for folk music, Chinese opera, classical music and Western opera; and the Science and Technology Museum, one of the world's biggest, featuring an indoor rain forest and a 230-foot-tall geodesic dome.
And that's just one neighborhood in one Chinese city.
Each month, China needs to build the equivalent of a Houston or a Philadelphia just to keep up with population growth. Each year, Shanghai – about the geographic size of the city of San Diego but with 10 times the population – constructs or renovates 200 million square feet of building space, about the same amount as all the office space in New Jersey.
To fuel that boom, and to feed its hungry factories, China uses more than two-fifths of the world's annual output of cement, one-third of its iron ore, one-quarter of its lead and steel, and more than one-fifth of its copper, aluminum and zinc.
The country's unprecedented demand for raw materials has had far-reaching effects, helping drive up the price of raw materials last year and creating short-term shortages throughout the world.
When victims of the 2003 San Diego County wildfires tried to rebuild their homes, some were told the price of wood had risen because of demand from China. And when the Sweetwater School District in Chula Vista wanted to repair some of its facilities last year, it had a hard time finding cheap concrete because so much was being used by China.
"A number of factors affected construction costs and timelines, but not the least was the tremendous demand for concrete and steel from China," said Bruce Husson, Sweetwater's chief operating officer.
Partly because of the price increases in raw materials, Husson said, some contractors submitted bids last year for almost twice what the projects were budgeted for.
"We had to slow down a number of (contract) awards because we couldn't afford such exorbitant prices," he said.
To most consumers, perhaps the most visible effect of China's growing demand is the recent rise in worldwide oil prices, as an ever-increasing number of Chinese switch from bicycles to automobiles.
More than 2 million new drivers hit the roads in China last year – helping make China the world's No. 2 consumer of oil, after the United States – and the number of new drivers is increasing at double-digit rates each year.
"The unexpected demand from China helped push crude oil prices above $50 a barrel," said Joe Sparano, president of the Western States Petroleum Association. "You have a market of 1.3 billion people that has suddenly discovered the automobile."
Although China represents only 8 percent of the world's oil demand – compared with 25 percent for the United States – its thirst is increasing exponentially and represents 50 percent of the growth in the market.
Steel and concrete
China is not the only reason for last year's shortages and price increases. War, terrorism and political disruptions helped push up the price of oil. Hurricanes and plant consolidations also put a crimp on building materials. Renewed production by North American factories chewed into metal supplies. In California, the demand for construction materials was also driven by a spate of public works projects.
Unlike one-time events that roil the marketplace, China's demand for raw materials represents a growing source of pressure that could affect commodities for decades to come.
"Over the long term, China's appetite for commodities and energy suggests that prices will rise, which will mean less spending power for the U.S. consumer and slimmer profit margins for U.S. companies," said Zachary Karabell, senior economic analyst and portfolio manager of the China-U.S. Growth Fund at Fred Alger Management.
There have been positive side effects of China's expansion. It has created a new market for suppliers of raw materials from Chile to South Africa and has breathed new life into the copper mines of Arizona, cement plants of California and steel mills of Pennsylvania.
As recently as three years ago, U.S. steel mills were in crisis, facing low-cost competition from China and other foreign locales. Some U.S. companies, led by the venerable Bethlehem Steel, filed for bankruptcy. Others shut down their mills and blast furnaces. Nationwide, steel mills were running at 78 percent capacity.
The situation was so bad that steel companies persuaded the Bush administration to go against its own laissez-faire inclinations and briefly impose trade barriers against Chinese and European steelmakers.
As China's construction boom took off over the past five years, the global steel market tightened, prices rose and steel mills in the United States revved up to 94 percent of capacity.
"In a relatively short period of time, most of the mills that had gone idle came back on line," said Nancy Gravatt, spokeswoman for the American Iron and Steel Institute. "All the steel mills were working fast and furious to meet the needs."
Thanks largely to demand from Asia, the U.S. steel mills should be humming for at least the next two years, according to a recent report from the International Iron and Steel Institute.
The cement industry saw a similar increase in demand. At the peak of the market last year, all 118 cement plants in the United States were operating at close to 100 percent capacity, and even then they could not keep up with demand. Last fall, 35 states including California were suffering cement shortages, causing delays for some construction projects, according to the Portland Cement Association.
"Last year was really a nightmare for a lot of projects," said Ben Sabati, who oversees cost control at Vanir Construction Management, a Sacramento specialist in such public projects as schools, hospitals and ports. "Many contractors couldn't get the materials they wanted."
He estimated that the cost of materials in the United States rose an average of 15 percent to 25 percent, compared with 3 percent to 5 percent in previous years. Although several factors contributed to the price increases – rising demand for steel in U.S. factories, the need for construction material after Florida's hurricanes, steel mill and cement plant closures – one of the biggest reasons was China.
"A lot of cement that the U.S. typically buys from Asia was diverted to China," Sabati said. "And China's demand for steel caused shortages in anything having to do with steel – steel structures, metal struts, sheet metal."
The shortage of materials has eased since last summer, but prices are still higher than before.
Larry Zolezzi, president of San Diego's LZ Construction, said that before the demand began rising in 2003, he could buy a yard of concrete for about $78. As demand peaked last year, the price soared well above $100. And even though prices have abated, they still range between the upper $80s and upper $90s. For some materials, such as plywood, which tripled in price last year, costs have not come down, he said.
"With all these price rises, you could easily see a 15 (percent) to 18 percent increase in the cost of a house," Zolezzi said. "When you're talking about a product worth $300,000 or $400,000, that could be a significant increase in price."
Dave Konstantin, who heads K-Co Construction in San Diego, said the continuing price increases make it hard to calculate costs when writing a contract for clients.
"The prices I quote one day don't benefit me two months later," he said. "It's very difficult to quantify beforehand how high prices are going to rise. We constantly have to raise our prices with customers to keep our profitability. It's brutal."
Cooling the boom
The Chinese government also worries that its red-hot growth rate could lead to bigger and longer-lasting worldwide price increases, sparking inflation not only in the United States and other countries, but in China itself.
To slow demand, Chinese officials have been raising interest rates, which has cooled construction a little. But foreign investment and skyrocketing exports have counteracted the government's lukewarm measures.
"Everyone knows Beijing is trying to slow things down. And everyone knows it won't succeed," said Anthony Chan, senior economist for JPMorgan Fleming Asset Management. "The bottom line is they can't slow the economy too much. They have between 70 million and 100 million people who don't have a job, so they're still under a lot of pressure to grow fast."
For America's cement and steel industries, the long-term solution is to ramp up production to meet an anticipated rise in demand. U.S. cement companies plan to expand their manufacturing capacity by 17 million tons by 2009, roughly an 18 percent increase in domestic capacity.
They will run into tough competition from China. The country already dominates the global cement landscape, accounting for 37 percent of the cement produced, followed by India and the United States. By 2006, China is expected to produce 340 million tons of crude steel a year, representing 30 percent of world production.
While China's demand for steel is increasing at 11 percent per year, production is growing at an even hotter 20 percent. That means China soon could be producing enough steel to meet its own needs and swamp the global market with cheap exports. That would lower prices for U.S. consumers – especially given the low value of the Chinese currency – but would throw the U.S. steel industry into another slowdown.
"If we get back to a situation where there's excess capacity on the market, China's low currency and the fact we have few trade barriers could once again make the U.S. an attractive place for it to dump steel," said Gravatt, the steel industry spokeswoman. "That could be our one area of vulnerability."
posted by Stephen McArthur at 11:00 AM
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