asian boom will support our long-term picture

http://www.theaustralian.com.au/business/asian-boom-will-support-our-long-term-picture/story-e6frg8zx-1225905071813

DESPITE the claims of some pointy-headed political scientists, every election is a good one to win.

Next Saturday's, especially.

Because the signs have now become unmistakable, as Asia sails out of the non-global financial crisis, that demand for Australia's commodities, the country's dominant exports, will continue to increase powerfully during the coming decade.

The Asian Development Bank forecasts roaring 7.9 per cent growth for developing Asia in 2010.

Even if China should choke economically, a most unlikely event, then India will be there, and Indonesia as well, each growing by 7 per cent or so a year.

History, corporate intelligence, development experience, and above all demographics underline this all but inexorable trend.

Steel demand is the key to industrialisation, to modernisation, and to Australian prosperity.

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India's per capita consumption of steel is 32kg per year, compared with a world average of 140kg. The Indian consumption is almost exactly what China's was a decade ago, since when it has soared 10 times to 331.5 kg per person. China last year produced 48.4 per cent of all the world's steel.

China consumed two-thirds of the growth in world metals output over the last decade. Its own appetite continues to appear insatiable, while India's economy is also pursuing its own relentless path towards urbanisation and development.

World Bank economist Shane Streifel says that the growth in demand from China and India "presents a large challenge to the metals industry, to almost double output over the next two decades".

Prices for iron ore and coking coal, the core components of steel, and of other commodities will fluctuate according to supply and conditions in ultimate markets. But demand will remain not merely firm but expansionary for the next decade at least.

And while Australia retains its advantage in transport cost and rapidity of response over its competitors in Africa and Latin America when it comes to supplying Asia, the good times will keep coming.

The chief variables that could still let this great opportunity for sustained prosperity slip from Australia's grasp are investment, ensuring that demand is reliably met, and infrastructure, enabling the commodities to make their way efficiently to their markets.

Richard Martin, Singapore-based managing director of business analyst IMA Asia, says that a crucial element in commodity demand in future is the way Indian gross domestic product growth consistently and sustainably ratchets up from 5 per cent a year to 7 per cent.

He says: "The pool of domestic savings is going up as a percentage of GDP -- the capacity to drive investment is going up, the capacity to build more infrastructure and to pay more to workers, who can start to buy TVs and cars and more food.

"And so, the whole thing takes off. That whole dynamic is now working in India, as we've known it to work in China.

"And good grief, Indonesia is about to do that as well, with its quarter billion population, on Australia's doorstep.

"We need a new acronym for this phenomenon, maybe ICI: India, China, Indonesia. Total population: 2.75 billion, 42 per cent of the global population."

Martin says it is likely that Europe and the US will stay sleep-walking, economically, for another three years or more. But while bad news for the global economy, that is no longer a disaster for Australia, as we have seen with our avoidance of recession during the recent Western financial collapse.

Australia's resource exports soared by 345 per cent during the last decade, to $131 billion in 2009 -- two-thirds of all merchandise exports. Our top merchandise exports are now, in order: coal, iron ore, gold and natural gas.

Education by far tops our services exports, with, again, China and India contributing the lion's share.

Despite earlier anxieties that, given Asia's enmeshment in the global economy, these countries would fall like dominoes, "the big guys in the region have domestically driven economies", Martin says.

Other Asian economies tend to be tied in with those successful leaders.

But South Korea, with 50 million people, has also developed its own successful growth model. While Japan has aimed at the top end, the Lexus end, in advanced economies, Korea has aimed at emerging markets, Martin says, offering value for similar products by pricing them at about half.

Japan's strategy has fallen over with its Western markets. "But Korea has developed a wonderful price-value chain." And Korea's appetite for Australian resources keeps accelerating.

At present, he says: "The mineral guys are getting all the attention, but the demand for soft commodities, for foodstuffs, is picking up as well, benefiting New Zealand, and especially its globally dominant dairy corporation Fonterra, as well as Australia."

Most people in China have sufficient food today, Martin says, "but in India a quarter of the population has insufficient, and as incomes rise they will focus on buying more food", while China's elite will buy more top-end niche foodstuffs and wines.

The average Chinese today consumes more than twice as much meat, milk, fish, fruit and vegetables as the average Indian.

Mark Pervan, ANZ head of commodities research, says: "Australia has a big role to play in meeting the new wave of demand from Asia."

He says that "the last decade has been all about iron ore, but this decade will be about energy and especially coal".

India has coal and iron ore of its own. But its demand for coking coal to make steel and thermal coal to generate power is running far ahead of that domestic supply chain.

Sydney-based AME Mineral Economics, consultant Wood Mackenzie and ANZ all forecast that by 2015, if steel and power growth is sustained at 15 per cent, India's coking coal import demand will have risen from 30 million tonnes last year to 106 million tonnes, and thermal coal demand will have risen from 42 million to 146 million tonnes.

Over the same period, they expect China's coking coal import demand to rise from 34 million to 62 million tonnes a year, and its thermal coal import demand to double from 83 million to 161 million tonnes a year. Other big buyers will include Japan, South Korea and Taiwan, which is also boosting demand, especially for thermal coal.

Is this feasible? Seshagiri Rao, the joint managing director of JSW, India's third-largest steelmaker, says he expects Indian demand to grow by 12 per cent in 2010, then 15 per cent in 2011 and a phenomenal 40 per cent in 2012.

Pervan says that the rapid emergence of the Indian import market for coal "tightens the whole supply picture". The big market there is for infrastructure. .

He says: "India's infrastructure is completely outdated" since it has scarcely been modernised since being built by the British during the original industrial revolution.

China needs imported coal, fundamentally for its thriving south and east coasts. They are now partly supplied by domestic coal producers in the country's north by rail and boat, but at a price that is almost two-thirds of the cost of shipping the higher quality Australian resource, which is mostly mined near the coast.

Wood Mackenzie says China's demand for liquefied natural gas will not displace coal, but oil, and the demand will shoot up from the present 9 billion cubic feet a day to 43 billion cubic feet by 2030.

Pervan says that while having a different profile, India's growth spurt in the next decade, like that of China in the last decade, will give it an immense appetite for many of the same commodities, including copper for cables. It will be power intensive.

To gain a licence from the government to build and operate power stations, Indian firms need to demonstrate a capacity to source the raw resources required. This explains, in part, the recent $3bn spent by India's Adani Corp to acquire Linc Energy's coal assets in Queensland.

Asia is not taking chances that Australia does not have the investment required to keep these commodities flowing.

Jamshed Irani, a director of massive Indian conglomerate Tata Steel, says that in the future "the dominant success factor for a steel company will be whether it has sufficient access to raw materials".