China will continue to drive the global economy and support the commodity boom. Naturally, the degree to which the Chinese economy is able to do so depends on several factors.
Firstly, the ongoing sovereign debt crisis and banking fragility in the European Union, the accompanying fiscal consolidation and a recession – the depth and severity of which is still unclear.
Secondly, firms and households in the USA are still in the process of deleveraging, meaning pedestrian economic growth rates will linger and elevated unemployment will take time to erode.
Thirdly, what happens to the Chinese economy in 2012 and further into the future.
George Fang, Standard Bank Group’s Managing Director and Head of Mining and Metals (China), says: “While we cant ignore the material downside risks, we anticipate a slow, gradual and managed softening of Chinese economic growth this year. Macroeconomic data, newsflow and anecdotal evidence are consistent with our expectation that this year will be a challenging one for the Chinese economy.
“Luckily, abating inflation has paved the way for much-needed counter-cyclical policy support. Policy will aim to engineer growth that prevents any sharp deviation of growth from trend during 2012, and will rely chiefly on constructive fiscal policy to do so.
“Importantly, the Chinese economy will surpass USD7.5-trillion this year, which is not only twice the size of Germany but nearly 50% bigger than the economy was at the end of 2007. So, it is critical to keep the size of China’s economic contribution to global affairs in proportion. Indeed, Standard Bank believes that China is still in an excellent position to support global growth, trade, investment and commodity demand,” says Mr Fang.
China will still lead a global recovery. China has achieved remarkable economic growth in the past decade, recording one of the highest GDP growth rates in the world. Even during the recent European financial and economic crisis, it reported 10.3% GDP growth in 2010, and 9.2% in 2011. And, it is China’s ability to continue to grow that will support mining and metals activity on the African continent.
We expect economic growth of around 8% this year. In fact, an economic deceleration is underway already. Virtually all data points – from machine sales to cement output, electricity consumption and freight transport, suggests that activity will fall to a low of 7.5% y/y in Q1:11.
Faced with renewed global weakness and a dual cyclical and structural economic downgrade, China’s policy impulse can and will plug the gap. Looking further ahead, rapid urbanization, modernization and industrialization, combined with a growing purchasing power, will continue to propel China forward.
Africa is mining’s last frontiers. The continent currently has 95% of the globe’s platinum group metals reserves, 90% of global chromite reserves, 50% of all cobalt reserves and more than 20% of global reserves in manganese, vanadium and titanium.
Chinese demands will continue to encourage African iron ore development projects. Around two thirds of African iron ore exports are to China.
China’s steel production is expected to continue to increase by 27% to 803m tones between 2010-15. With the new production from African Minerals Tonkolili project coming on live towards the end of 2011 and the number of iron ore exploration projects underway in Guinea, Mauritania, The Republic of Congo and Cameroon, will significantly increase the continent’s iron ore production. China’s increased consumption provides excellent opportunities to develop Africa’s iron ore assets.
The slowing world economy also presents African and Chinese financial and commodity institutions with a distinct advantage on the African continent. European and US financial institutions are still grappling with liquidity issues post the financial crisis. Added to this, commodity asset are very well priced.
Fang says: “The year of the dragon is Africa’s time! The sense of investor hesitation is fast dissipating as the potential for the recourse continent unveils itself. The continent represents immense opportunity. African and Chinese financial institutions are well capitalized and funded, eager to assist commodity ventures that are geared for future growth.
“The continent remains largely unexplored and under exploited. Now is the right time to explore an African expansion plan. One that will facilitate economic growth in Africa, and support China’s growing demand as its economy expands.”
Source: Standard Bank