Is Chinese GDP Growth Sustainable In The Face Of Natural Resources Supply Growth Constraints?

by Jack Lifton on December 8, 2010 · 10 comments

in Metals & Minerals, News Analysis

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The absolute importance of access to natural resources for a country’s future, can be well-illustrated by speculating on what could happen to China’s seemingly unstoppable growth, if the production rate of all metals does not grow in parallel to the world economy.

Figure 1 below, appeared last month in the Wall Street Journal, in an article by the distinguished British historian Niall Ferguson, titled 'In China’s Orbit'. It projects GDP growth over the next 40 years for the world’s currently wealthiest (the USA) and the world’s two most populous nations (China and India). In his article, Professor Ferguson touches upon the extraordinary growth in China’s demand for metals over the last generation, but he doesn’t either examine the situation in depth nor draw any conclusions about this rate of growth as a limiting factor on the possibility of further such growth. Look at the chart, and I will then make a few remarks.

Figure 1: projected annual GDP for China, India and the USA

Figure 1: projected annual GDP for China, India and the USA

The source of the above chart is Goldman-Sachs, surely one of America’s most astute financial operators, and, one would also think, conservative prognosticators. I am therefore surprised at these projections being so optimistic for China and India. That said, keeping in mind that there are lots of projections out there of even more optimistic (very high) growth, it's important to understand that the above figures are indeed actually conservative.

As a reference, keep in mind that the 2010 CIA Handbook estimates global GDP (on the basis of purchasing power parity) to have been $68.59 trillion in 2007, $70.49 trillion in 2008 and $69.98 trillion in 2009 (all based on 2009 US dollars).

I have written extensively over the last two years about the global production of all metals and about China’s arrival in 2009-10 at the position of being the largest producer (supplier) as well as the largest end-user (demand) of metals in the world.

The $70 trillion GDP figure for the 2009 world economy included the production and consumption of 1.2 billion tons of all metals. According to the Goldman-Sachs analysis quoted by Professor Ferguson, China alone will produce the GDP of the entire world of 2009 by 2054 - that is to say, within 45 years. Yet, even if China achieved this phenomenal growth, it would still have a lower GDP/citizen than the USA in 2054, if the US population keeps the same ratio to Chinese population that it has today, which is 1:4. China’s 2054 GDP would only be twice that of the USA’s in 2054, if its population is still four times that of the USA.

Assuming that China’s GDP in 2054 will be twice that of either the USA or of India, China’s economy will be less than half of the world’s total GDP since there will be many nations in addition to the USA and India with substantial GDPs. We can therefore easily and conservatively estimate a global GDP for 2054 of $200 trillion US (2010) dollars. This is three times the global GDP of 2009.

The world economy would have to grow at a compounded rate of 2.47% per year to bring it from $70 trillion to $200 trillion in 45 years. The US economy would only have to grow at a compounded rate of 1.55% to double in the same period. Both of these figures seem do-able. China’s economy would however have to grow at a compounded rate of 6.05% for 45 years in order to reach the value on the Goldman-Sachs graph above. This would be the longest sustained growth at such a rate, beginning from such a high place (2010 China’s $5 trillion GDP), in history.

For the sake of argument, let’s assume that this rate of growth for the Chinese economy is do-able. This would mean that in just under 12 years, by 2022, China’s economy would double, albeit to only $10 trillion. Note that if China’s growth rate, on the other hand, continues at a rate the same as it has had in 2010 (>10%) then the Chinese GDP will double in just 7.25 years.

The question I want to ask is this: can the global production of all metals grow at the same rate as the Chinese economy, and if so, would such a growth rate be enough to allow the next powerhouse(s) such as India or Brazil to begin growing at a similar rate or even more ominously to begin growing at all?

The rate of growth of all metals, which I define as GMP(1), the annual total Global Metal Production for all of the metals produced in the world, is dominated by iron, in the form of crude steel, which has consistently been 90% or more of global metals production in total.

The rate of growth of the production of all metals except steel (iron), GMP(2), has been parallel to the rate of growth of either the world’s or China’s GDP for the last ten years. It has remained at roughly 10% of the world’s total production of all metals.

The increases in the general total of the production of all metals other than iron, have been mistakenly seen as an independent phenomenon for each of the non-ferrous metals. This means that GMP(2), as linked to GMP(1), has not been reported or studied, and perhaps even has been missed by financial observers, due to the disinterest of the mainstream media in any detailed analysis of the global production of all metals.

In the last 10 years, the first 10 years of the 21st century, crude steel production has increased steadily except for the period during the 2007-2009 world economic recession, and even this halt to growth was actually a geographic anomaly. China’s torrid growth in the output of crude steel has not had a stable or negative growth year in the 21st century. During that period Chinese crude steel production first surpassed that of the USA, then Europe and Japan in successive years prior to 2005.

Since that time, Chinese steel production has grown to 50% of the total of the global production of steel, from just 15% in the year 2000 (see Figure 2). The well-respected Hong Kong brokerage CLSA, predicts that in 2012, Chinese steel production will reach more than 700 million tons. This will probably be 10 times the steel production of the USA in 2012, and most likely more than 60% of the total production of all metals, GMP(1), in 2012.

Figure 2: Chinese steel production as a percentage of world production. Source: CLSA.

Figure 2: Chinese steel production as a percentage of world production. Source: CLSA.

My thesis is that the only way for the Goldman-Sachs projection of the growth of the world’s total and individual national economies to have any possibility of being accurate is for

Δ GMP(2) ≥ Δ GDP

That is to say, that for those economies to reach that level, the rate of growth of the production of all metals, other than steel, must be greater than or equal to the rate of growth of the global domestic, product or the individual gross domestic product of any nation.

To defray one immediate criticism, let me say that I understand that economists hold that the rate of consumption of metals by national economies tends to stabilize as the particular nation’s economy matures. However, I believe that such stabilization, if it occurs, does not occur until the nation reaches a goal, which in the case of the present world, is to match the 2010 GDP of the USA and then to match it on a per capita level. Goldman-Sachs predicts that China’s GDP will reach the first gross match of that of the USA, in 2027. Even if growth were to then cease in China, it would require a tripling of Chinese consumption of all metals by 2027 to meet even the goal of matching the US’s then projected GDP.

The key problem for the maintenance of global GDP growth, even at the conservative Goldman-Sachs rates, is whether or not GMP(2) can maintain its growth rate so as to continue to be 10% of GMP(1).

Let me state at this point, that the issue is the continuation in the rate of growth of the production of the metals constituting GMP(2), in the ratios in which they are produced today, because those ratios represent the uses that our technological civilization requires. If the production rates and relative proportions shown in Figure 3 are not maintained, then China’s growth must slow. If there is no major increase in GMP(1) with the concomitant increase in GMP(2), then neither India nor any other large nation will be able to grow its GDP as China has done.

Figure 3: Global metal production as a proportional of all metals produced.

Figure 3: Global metal production as a proportional of all metals produced.

It is thus critical to the world’s growth, and I think stability, that the question of whether or not non-ferrous metal production rates can keep up with projected demand due to the growth of first the Chinese and then the Indian economies, must now be addressed by the global financial and political communities.

Geological and mineral processing experts will tell us if there are enough ores of sufficient grades in actuality and in theory for global growth to be maintained as projected. But there is not today a sufficient store of reliable transparent data to make such a determination.

Ridiculous theories and statements on the amount of metals contained on the average in the earth’s crust, or in the ocean, or at the bottom of the ocean are used to shunt aside the questions I raise in this paper as representing alarmist fantasies about peak metals. In fact, it is only accessible deposits of high-enough grade (concentration) to be economically recoverable by known or well developed extraction and refining technologies, that can be considered as candidate resources for metal supply. After that determination, it is then required to measure the need for capital, energy, water, and skilled labor to maintain the highest production rate possible within our ability, without distorting our economy, for example, by rationing.

The issue therefore, is to determine if we already reached a peak in the production rate for any metals in the GMP(2) category that are of such technological importance that further expansion of key technologies must be curtailed so that consumer product rationing by income level or geography or both must now or soon be practiced?

There must be a worldwide inventory of resources and processing technologies used in their production, to add up the invoice for a high standard of living for all of our descendants. We need to find out if we have already maxed out the credit card nature has handed us. If so, we must all change our style of living before nature makes that choice for us.

Japan has been buying natural resources and, where it could, control (ownership) of the means of the production of natural resources for more than a generation. Today China has come seemingly from nowhere to challenge and compete with not only Japan but also Korea and India for natural resources, of not only metals and minerals, but also of oil. The danger for the world is that competition among those three for resources, the production rate of which is not growing proportionally as fast as all three economies, will lead first to severe trade restrictions (protectionism applied to domestic natural resources seems already to have begun) and then to armed conflict.

Those who dismiss the contra-temps over the rare earths as trivial and who at the same time ignore the tensions created between Japan and China by purposeful interference in the free trade of just one group of metallic resources, are in danger of ignoring genuine storm signals for our way of life.

I hope I am wrong. I have yet to hear a cogent argument proving that I am.

Please tell me where the free lunch is going to come from in a world of resource nationalism?

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1 fred cohen December 8, 2010 at 8:26 pm

I agree that there will be conflicts over metal supply and other natural resources.
Some of the solution will come from as yet undreamed of innovation. The extend of technological breakthrough will determine the nature of the conflicts.
China’s growth rate will ultimately slow. They are still reaping the low hanging fruit that comes with piggybacking a stone age economy onto the backs of modern ones. And they are far from being the kind of free society that can spur dynamic growth indefinitely.
The surprise may be how fast other third world countries develop. Collectively they could have a big impact.
I have been enjoying your newsletter. Very nice work.

2 robit December 8, 2010 at 9:09 pm

The following is from a Bloomberg article on 2 November and was posted on the RMB on 15 November:
China’s minor metal producers rose in Shanghai and Shenzhen trading after a report saying that China is studying the start of strategic reserves for 10 metals….. The 10 metals include rare earths, tungsten, antimony, molybdenum, indium, germanium, gallium, tantalum, zirconium and tin, according to the Shanghai Securities News today.

From my recent research I would add lithium, berryllium, magnesium, vanadium, hafnium and tellurium to the list. There is also a mad scramble to tie up the best and biggest deposits of uranium and potash.

The amount of money flowing around the world trying to get a hold on economically strategic resources is astounding. I have had two mining investments bought out in the last month and several others have had significant percentages bought by larger companies or various types of financial entities.

3 Dan Collins December 8, 2010 at 10:10 pm

Great article. The Asian’s are way ahead on the concept of Resource Nationalism as well as Production Nationalism. All of us from Detriot have experienced first hand the results of America sitting out the global resource and production game. Hopefully, we wake up soon.
As someone who has lived in China for over ten years I can tell you China’s GDP is actually already higher than the U.S. They build twice as many cars as the U.S. and ten times the amount of steel. The U.S. records GDP has printing money and giving it to people to go to Walmart. That’s not real GDP.

4 Dr. Dietmar Siebholz, Germany December 9, 2010 at 4:27 am

Dear Mr. Lifton,

congratulation; you hit the nail. I am convinced that only a small number of analysts have thought about the consequences you have told about in this article. The problem for them is, that they only see (they have no time to investigate deeply enough) only the big numbers, not the details.

You surely know, that the EU commission has published a report concerning the 14 metals and minerals, where a supply interruption or a diminuished sypply can bring the European industry to struggle. The minerals and metals reported in this analysis are nearly identical with that, another comment has named before me. What nobody has mentioned, is the same development of graphite as the REE´s at the beginning of this century. Former price declines, concentration onto China, new technologies with need for graphite, no exploration efforts in the west…
Best regareds

Dr. Dietmar Siebholz

5 Max December 9, 2010 at 9:59 am

Dear Jack,

Thank you very much for a very well-written, very well-reasoned, very well-argued… (and long overdue) article.

For a very long time I have been an optimist “at the micro level” and a pessimist at the macro level. (the micro-level, defined also as my own personal life and situation …..which is something I can more or less do something about, shape, affect, influence and etc.)

Whereas the macro level is a collective responsibility and I have little hope that humanity will be able to “step up to the plate” …and do so in time.

But if you take the perspective of a Martian (or maybe even of an extragalactic creature who can see us from extremely far away by seeing “much faster” than the speed of light (a second violation of the laws of nature since you have already mentioned one) the survival of the human race is probably not one of his major concerns.

I personally doubt that our “values”, institutions, political systems, economic systems, social systems, cultural systems…and their related policies and etc. etc. will be able to respond in time to avoid catastrophe.

But it is also unlikely that every single human will die. Those who are left over hopefully will think of some better system(s) for humanity to live with or under….(other than about 200 nation states, all speaking different languages and having different “beliefs” and etc. etc.)

Basic arithmetic (which is out of fashion these days) would probably indicate that we can either have 1 billion people on the planet each consuming 100 units of GDP (and resources “and etc. etc”. ) (i.e. and polluting, contaminating and destroying) or we can have 10 billion consuming only 10 units. (or 100 billion consuming 1 unit each)

But to do the second or third options and thereby achieve the ever more illusive and elusive “sustainability” everyone would need to be willing (and able) to do with a lot less.

You have started to “do the math” and nature will take care of the rest.

All the best and regards (and again thanks)

Max

6 fran December 9, 2010 at 2:32 pm

could political/economic alliances disrupt the free/open[almost, for the most part] markets which are basic to your argument?

is this not the road upon which china has embarked? as their need arise?

7 robit December 9, 2010 at 2:43 pm

Thanks to Dr. Siebholz for pointing out the European Commission report. In addition to my list posted above, the EC adds: Cobalt, Fluorspar, Niobium, Graphite and PGMs (Platinum Group Metals = ruthenium, rhodium, palladium, osmium, iridium, and platinum)

I am hoping Jack or others will point out any omissions that have some factor of potential world shortage.

8 Daniel V. December 11, 2010 at 3:05 pm

Once again, Mr Lifton has explained, and shed light on a seemingly complex topic with precision and ease. This will become a much more discussed topic in the mainstream press as we move forward into the millennium of tech metals. I see a widening of the global wealth to poverty gap, as larger wealthier nations strong arm smaller ones over resources, leaving many weaker nations in the dust of the global growth race. The Goldman Sachs estimates may be close to reality for those three nations, but it is quite possible that there won’t be sufficient resources for other nations to follow suit. As Jack pointed out;

“If there is no major increase in GMP(1) with the concomitant increase in GMP(2), then neither India nor any other large nation will be able to grow its GDP as China has done.”

9 Eamon Keane December 12, 2010 at 8:45 am

Great article, food for thought! You should expand on this in future articles.

A few issues:

Although good data is hard to come by, for the US, at least, there was no relationship between change in primary metal demand and change in GDP from 1930-2006; with an r^2 of 0.214. Big graph here:(tinyurl.com/34t3jvz); data from USGS (pubs.usgs.gov/fs/2009/3008/) and Bureau of Economic Analysis (tinyurl.com/35b35xg). The data for American metal consumption is quite erratic from year to year, despite more or less constant GDP growth (although this is for GMP(1+2)).

Not differentiating between the different GMP(2) elements loses some key detail. For example, some elements are tied together e.g. aluminium+gallium, zinc+indium. A potential growth area for both gallium and indium is in CIGS thin film solar. CIGS remains dependent on government subsidies. There are other ways to harness the sun without these elements.

There are abundant reserves and resources of bauxite – I wouldn’t include aluminium, which is very recyclable, in GMP(2).

90% of chromium ends up in stainless steel, which is also easily recycled. According to the USGS, the world has sufficient chromium to “meet conceivable demand for centuries”.

The key issues as to whether lack of metals will retard economic growth comes down to substitutability and increased efficiency. With dysprosium the main growth area is electric motors, which if needs be can revert to ferrite or AC motors. Additionally Japan now recycles and has found ways to apply it more effectively to increase intrinsic coercivity.

Which is not to say there aren’t places where element shortages will require changes – for example the best CFLs and LEDs require terbium and europium, which is going to be an issue. As may tellurium for CdTe solar cells. However I wouldn’t say it’s a major economic dislocation. I’d be interested if you could identify where you think serious long-term economic damage would be done.

10 Ruediger Haberland December 19, 2010 at 3:32 pm

Is Chinese GDP growth sustainable?

I don’t think that the growth rate will be steady state upwards.
Some metals will be short in supply, some minerals (phosphor) too.

With metals: there is a relation:
a.: rising resources % / rising price %
I know this for Uranium, having a factor of 300 more in availability if prices rise by a factor of 10.
Source: SciAm.
So there will not be a longterm shortage, price will simply rise and new “mines” opened.
Price of natural Uranium is nearly not influencing price of electricity frum Nuclear Power Plants.
But this is totally different for any of the other metals maybe except Calcium and Magnesium.

Indium has replaced lead in solders, is needed in PV solar cells and in many displays.
Indium is mostly a byproduct from Zinc refining.
So where to get if demand exceeds supply and at which cost if demand doubles?

I have no idea if these data are existing for any of the other metals that may be continuously or momentarily not available sufficiently.

Search for a replacement is easy for copper: aluminum has 60% roughly of the electrical conductivity of copper. Power grid lines are made from aluminum alloys since many decades, so small motors, transformers and housewiring may follow soon.

Replacement for steel is limited to the use of concrete – reinforced or not, but much less steeel used . Only minor amounts are replaceable by aluminum or plastics.
But a partial replacement will help a lot in smoothing out heavy price oscillations.

I do not see a replacement for the steel-alloying elements, so Cr, Ni, Mo, Co will be in short if demand is rising further. With Ni there are 2 big producing localities: Sudbury and Norilsk (both from geologically old meteoritic impacts), so there will be limited supply in the future and stainless steel will be recycled better than now and may be restricted in use by rising prize. Co is especially critical as Kongo is a major mining site (in the last Cobalt-crisis Kongo had 90% of the world mining capacity for Co.) If failing politically prizes may be skyrocketing. And so SmCo-magnets, basis of heavy duty motors that are allowed to run hotter than with FeNdB-magnets.

Platinum will be of special interest because its use as catalyst in cars exhaust cleaning is wasting near 30% of the typically 2 grams that are used. Some Palladium therein too same situation.
Unless other catalysts are found we will either have to develop motors that are “clean” so don’t need a catalysing afterburner (no way to be seen today) or we will have to abandone using Pt in these wasting application and accept once more a lot of unburnt Hydrocarbons in the exhaust. To reach this limit the price has to rise above 300$/g (my estimate, not biased on any information).

Rare earths: we will have to introduce a recycling scheme for energy saving lamps and computer screens.
How much of the price of a typical ? screen or incandescent lamp or HQI-lamp is from rare earths?

So all this will limit continuous growth, not only in China, dwindling supply will limit any producer of equipment.
China will have a nearer difficulty: where to spend the many $$ accumulated? This pile is growing faster than they can spend the $$.
And a very near one: the real-estate bubble to burst within one or 2 years. (My own estimate, by feeling only).

So other dear readers, please share your information on these topics.

Merry Christmas to everybody and a Happy New Year 2011
and don’t forget
“che sera sera, whatever will be will be…”
RH

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