Have you heard of the modern ghost city in China built for one million inhabitants that is presently empty? Time and CNN with their photos and stories have raised the profile of the city of Ordos, a newly constructed city near some major resource projects in Inner Mongolia. Other commentators fascinated with the photos have served to help spread the notoriety. The implications were that this was a Chinese construction bubble in the extreme, working on overdrive, with a possible crash in the works.
This concern sparked a special interest from this writer, since part of the economic drivers for the world-wide commodities and metals boom, which I am concentrated upon in investing, is the large demand from the construction activities that are happening within China. If the demand is not real, or if the demand falters, then there may be serious impacts on the pricing of commodities, metals and, by extension, in the equities in stock markets around the world.
Since the writer has spent time living in China, a decade apart, the views presented here may be a bit more cognizant of the disconnects from the Chinese culture to the usual western contexts. China is a land of immense contrasts to western culture. First, is the scale, as China is home to 1,300 million people, 900 million still living in rural areas as of 2009 (Xinhua, 2010). I still recall my visit to a hydroelectric installation near the isolated village of Gutian in Fujian province, as stated my hosts. Well, I was expecting a small town of a few hundred people. Actually Gutian is a bustling city of 500,000 people (to my western eyes).
Another example of scale is when I first visited the farming community of Shenzhen which borders Hong Kong, 15 years ago to straighten out my expired visitor's visa. There were only a few tall buildings such as the public security building and the electric power utility building. Now you know Shenzhen as the most dynamic city in China with a population of over 20,000,000 inhabitants. Possibly over half are migrant workers, who only came to work. China has over 250,000,000 migrant workers in the larger cities, that have come from the rural areas (Xinhua, 2010).
I am informed that the majority of the present Chinese leadership are engineers by training; the central government had determined during their adolescent years that the county would benefit the most with more trained engineers to build the country. Therefore the brightest and best students were shuttled into the engineering streams, as this was the highest calling in education.
One characteristic of engineers, you may be aware of, is that they are extremely pragmatic. It was impressed upon me that when a new highway went through an urban district, the highway wins. Buildings that were in the way were not demolished, but modified to accommodate the highway, in other words, half the building was demolished and then re-bricked back up. It was quite interesting driving along the new route seeing all these buildings with gaping holes in them.
It never fails to amuse me that so many commentators and newsmongers fail to research the topic that they are presenting and thereby distort the audience perception. To try and prevent myself from falling into this same trap, I performed some personal research into the question of building construction in China. I asked a few people from China about their views.
First was my trusted associate, Dr. Judy (pseudonym). Her first response was, "take a look at Pudong, originally it was empty." Pudong is the present site of China's busiest airport (3rd busiest in the world for freight), 19 miles from downtown Shanghai on the bund. The airport is connected to downtown by a magnetic levitation train that makes the trip in 7 minutes. Presently Pudong is home to 1.5 million inhabitants. Yet in the beginning in the early 1990s, Pudong was empty and had many detractors as there was nothing there to attract inhabitants.
Dr. Judy's second point is that there needs to be a critical mass before things start happening. People inhabiting an area need food, transit, local services, local eateries and entertainment all within walking distance. Until that critical mass is reached, most people will stay away, because unlike North America, the average person in China does not drive. Therefore not only do the buildings need to be finished, but the whole social - economic environment of the area needs to be started up before people come.
About Ordos, I asked a friend, Mr. Li (pseudonym), whose home town is in Inner Mongolia. He was quite proud of the fact that in the Ordos area, they boast the second highest per capita income in China next to Shanghai. He says, they have money, from the resource development projects. All the larger cities in Inner Mongolia have had new residential developments, it just happened that the Ordos project was the largest. Apparently, as the new homes and buildings are paid for, he did not see any problems. The Chinese either put their savings in the bank or in hard assets such as buildings. Another point is the fact that some of the buildings are not owned by individuals but by family groups.
Another friend and business associate, Mr. Handsome (pseudonym), lives in Kumming, Yunnan province, and he commutes to North America frequently. He sees no issues with the property markets in China and states that the real demand is there. There is that huge shift of an estimated 450,000,000 people from rural populations to the cities within the next 30 years.
It is a cultural imperative in China, that when you own property you achieve success in life. That is what appears to be driving the construction boom in China.
Having performed this review, the author is comfortable with the thesis of the continuation of China's demand for raw materials for construction and continuation of economic growth in China. Recent moves such as the Chinese Christmas Day announcement of the increased percentage of reserves for banks by the government are only minor adjustments to tone down the growth to ensure that it does not overheat.
With the economic engine of China being part of the continuing world demand for raw materials and metals, what would be some likely investments? Well, there is thermal coal for power and metallurgical coal for steel. The monsoons in the region have conspired to drive prices higher, along with the floods in Australia and the export bans in India. Walter Energy (WLT) is positioning to sell metallurgical coal to Asia with the acquisition of Canadian Western Coal. Cliff Natural Resources (CLF) is positioning to derive half their income from Asian sales of iron ore and coal.
One metal commodity that has not seen prices rise much yet in the economic growth coming is Aluminum. First would be Alcoa (AA), the largest integrated supplier in the world. Second would be depository receipts of Australian Alumina (AWC), which sells mostly to Asia, the aluminum oxide raw material. Alumina is JV with Alcoa with 40% of Alcoa World Alumina & Chemicals.
The growth in demand of metals and commodities is real and is continued to be led by China. The wise investor would ensure that at least a portion of his or her portfolio is exposed to the growth in this sector.
Disclosure: The author is long junior mining stocks and commodities. I have no position in stocks mentioned in this article.
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