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Chinese economic growth and the demand for metals

China and the world economyRoberto Castello Branco

EPGE, March 2011

China and the world economyRoberto Castello Branco

EPGE, March 2011

2

Growth skepticism

Chinese role in the global metals markets

Are commodity exporters doomed to poverty?

Agenda

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Growth skepticism

4

50

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500

550

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950

index

The Asian growth path showed a sharp contrast with the experience of developed nations

Real per capita GDP growth – developed economies

Source: Angus Maddison, “Countours of the world economy, 1-2030 AD”, Oxford University Press, 2007

5

0

100

200

300

400

500

600

700

800

900

1,000

1,100

t t + 5 t + 10 t + 15 t + 20 t + 25 t + 30

years after the start of growth acceleration

index

China

Korea

Taiwan

J apan

Real per capita GDP

Sources: Vale and Penn World Tables

Since the second half of the 20th century Asian economies have experienced unprecedented growth rates

6

Expansion multiples of GDP

China¹ 12.5

Korea² 8.2

Taiwan² 7.8

Japan³ 6.9

Hong Kong² 6.7

Singapore² 6.6

Developed economies4 5.3

1 1978-20072 1965-19943 1950-19794 1820-1950Sources: Vale and Penn World Tables

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Gross enrollment rates in China

¹ 2005Sources: US NCES and UNESCO

Primary Secondary Tertiary school school school

1980 113 46 2

2006 111 76 19¹

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Sources of China’s growth

Source: “Accounting for growth: comparing China and India”, B. Bosworth and S. Collins, NBER working paper 12943, February 2007.

Output Contribution of total

factor productivity

1978-2004 9.3 3.8

1978-1993 8.9 3.6

1993-2004 9.7 4.0

%

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Chinese role in the global metals markets

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Vale is one of the largest companies in the world

2002 20032004

20052006

2007

February 28, 2011

Vale position in the FT 500 ranking¹

¹ Ranking of the 500 largest companies in the world by market cap –

Financial Times, position on 31 March of each year

500 400 300 200 100 1

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74

117

153275334446

25

42

2008

2009

202010

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Vale in 2011

A global company, with offices and operations on all continents…

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Coal

Iron ore & pellets

Nickel, cobalt &

PGMs

Copper

Potash & phosphates

Manganese &

ferroalloys

Logistics

Brazil54%

North America

25%

Asia10%

Australasia10%

Other1%

... and a global base of world-class assets

Asset baseby geography

Asset portfolio

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A large exposure to Asia: major operations and offices in the Asia Pacific

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Supporting Asian growth

Revenues

Asia26.6%

China7.7%

2002

US$ 4.3 billion

China33.1%

Asia53.3%

2010

US$ 46.5 billion

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We are the only company in the Americas listed on a major Asian stock exchange

New York2000

Paris2008

São Paulo 1943

Hong Kong2010

¹ with the listing in Hong Kong.

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US China

China’s steel consumption intensity has been much higher than the US peak level not only due to accelerated growth but also due to structural characteristics

Steel consumption intensityton / US$ 1,000 of real GDP

Source: World Steel Association, IMF, USGS and Vale

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0

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900

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1997

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2009

China

Developed economies

Copper consumption intensitykilos / US$ 1,000 of real GDP

Source: World Steel Association, WBMS, IMF and Vale

0

10

20

30

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50

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70

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95

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96

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China

Developed economies

Nickel consumption intensitykilos / US$ 1,000 of real GDP

China’s consumption intensity of base metals has surpassed developed economies

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0

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95

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Iron Ore

Steel

Nickel

Copper

Share of China in global consumption of metals%

Source: World Steel Association, WBMS, IMF and Vale

As a consequence, China has become the number one consumer of industrial metals in the world

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0

500

1,000

1,500

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3,500

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4,500

5,000

1970

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1974

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2000

2002

2004

2006

2008

2010

LMEX index¹

¹ LME base metals prices index, includes: copper, aluminum, nickel, zinc, tin and leadSources: Vale and Reuters Ecowin

Strong Chinese demand expansion has been the main factor underlying the sharp rise in base metals prices

20¹ prices in 2009 US$/ton, deflated by the CPI.Sources: USGS and Vale

3.0

3.5

4.0

4.5

5.0

1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009

log

sca

le, r

ea

l US

$/to

n¹

Real iron ore prices Long-term trend

The increase in relative scarcity is driving the upward long-term trend for iron ore prices

1900 - 2009

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Chinese dependency on imported iron ore

Source: World Steel and Vale

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1985 1990 1995 2000 2005 2010

0.62

Despite Chinese efforts to boost iron ore output, it is increasingly dependent on imports

0%

10%

20%

30%

40%

50%

60%

70%

1990 1995 2000 2005 2010

Japan Germany China

Share in global iron ore seaborne trade

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Japanese trading companies acquired stakes in mining

assets across the globe.

Japanese official financial institutions provided funding for

project development.

Apparently, the Chinese are willing to replicate the

Japanese experience to guarantee a steady supply of raw

materials.

In the past, in a less liquid world, Japan played the dual role of being the demand driver and financier of mining

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In the past there was no financial globalization.

Different models: private sector versus state-owned

companies.

The Japanese investment was not sufficient to

change the long-term trend.

Lessons from the Japanese experience

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Africa is the new mining frontier

Source: Metals Economics Group, 2010.

World nonferrous exploration budget

Southeast Asia6%

Rest of world17%

Latin America26%

USA7%

Canada16%

Africa15%

Australia13%

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Are commodity exporters doomed to poverty?

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The strong global demand growth for commodities caused significant gains in terms of trade for Brazil

Source: Funcex

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160

170

180

1990

1993

1996

1999

2002

2005

2008

2011

index,

1990 =

100

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Commodity exporters can be rich

¹ 2009

Sources: IMF, Haver Analytics, PennWorld tables, MIDC-SECEX, StatCan, Statistics Norway.

Commodities and economic development

US Australia CanadaNew

ZealandNorway Chile Brazil

(A) Commodity exports¹ - US$ billion 308.2 128.2 175.9 17.6 93.1 34.1 83.0

(B) Total exports ¹ - US$ billion 1,068.5 195.5 324.2 24.8 120.1 53.8 153.0

(C) GDP¹ - US$ billion 14,119.1 994.3 1,336.1 117.8 378.6 161.7 1,574.0

(A) / (B) - % 28.8 65.6 54.3 71.0 77.5 63.4 54.2

(A) / (C) - % 2.2 12.9 13.2 15.0 24.6 21.1 5.3

Real per capita GDP relative to the US, 2007 - %

100.0 87.1 85.7 60.2 118.4 47.3 22.1

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Investment in human capital and infrastructure.

Quality of institutions.

Policies stimulative of private sector investment.

Flexible exchange rate regime.

Countercyclical fiscal policies.

Natural resources and economic growth

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