China’s Energy Sinkhole
January 29th, 2007Via: Economist:
Now there really is a giant sucking sound—not one made by the flight of jobs, but by China ferociously hoovering up commodities and raw materials. Although it accounts for roughly 4% of global GDP (measured at market exchange rates), China consumes 30% of the world’s supply of minerals and other raw materials. This time around, the world has not only heard the sucking sound, but has also felt its effects, as the prices of commodities such as iron ore, copper and zinc have soared, doubling or tripling in just a couple of years.
How has China suddenly developed such a big appetite? The economy has been growing at a dizzying rate, recently by double digits. Much of this growth is driven by fixed-asset investment, which now accounts for more than 50% of GDP a year—a higher proportion than that of any other country at any time in history. This relentless capacity for expansion has created an insatiable demand for raw materials.
China also wastes a lot. Take energy consumption. China required 4.3 times as much energy as America in 2005 to produce one unit of GDP, up from 3.4 times in 2002. It can be argued that much of China’s new investment has not yet reached optimal efficiency. That may be true, but it does not explain why things are getting worse: China consumed 15% more energy per unit of GDP in 2005 than it did in 2002. India, also a rapidly expanding economy, consumes only 61% as much energy as China per unit of GDP.
China’s wasteful growth has brought joy to commodity producers and their bankers and shareholders worldwide. With rising profitability and stock prices, they have been happily expanding mining operations and acquiring or merging with rivals. But there are reasons to believe that the surge in commodity prices worldwide has run out of steam.
There is strong evidence that the current cycle of China’s investment-led growth has peaked. A clear sign of overheating is the increase in accounts receivable. Although sales appear robust, Chinese firms are beginning to find it difficult to get paid in cash, either because their buyers cannot turn over their own stocks fast enough or because they have trouble borrowing money to finance their purchases.
