No end to China's demand for commodities

SYDNEY - Demand from China will extend the boom in commodity prices for five more years, Australia's biggest rail equipment maker says.

"We expected by now to see a slowdown but that's just not happened," said Richard Leupen, chief executive of the United Group, which supplies locomotives and wagons to mining companies.

"If anything, it's accelerating."

China's economic growth unexpectedly picked up in the second quarter to 9.5 per cent as exports surged and investment in power plants, mines and factories gathered pace.

Commodity prices climbed to their highest in 24 years on August 12 as crude oil, petrol and copper rose to records and natural gas soared.

BHP Billiton, the world's biggest miner, Rio Tinto, both United Group customers, and Brazil's Cia Vale do Rio Doce are spending US$8.5 billion ($12 billion) on mines, rails and ports in Brazil's Amazon and Australia's Outback to supply raw materials to China, the globe's largest consumer of steel, copper and zinc.

"The skies look clear in the mining, metals and steel sector right now with a reacceleration of global growth supporting close to record share prices for many equities," said Merrill Lynch analyst Vicky Binns.

Stock prices could rise another 30 per cent should commodity prices remain near records for a year and gains could be even bigger because of the "China effect", she said.

The surge in China's consumption has pushed up shares of Melbourne-based BHP by 56 per cent in a year to an all-time high.

Shares of London-based Rio have risen 40 per cent. China's economy has grown at an average 8.6 per cent a year in the past decade, fuelling demand for metals for bridges, buildings, cars and cables and driving prices of iron ore and coal to records.

"Everybody said China was going to slow down. It's not," said Scott Hand, chief executive of Inco, the world's second- biggest nickel producer. "Industrial production growth this year is at 16 per cent. That's incredible. The dragon is hungry."

Investors worldwide raised stock holdings to a six-month high this month on speculation economic and profit growth will accelerate, a Merrill Lynch survey found last week.

"A lot of the China-related stocks, such as miners are priced for long-term growth, so the odd scare may cause some short-term selling but the longer-term fundamentals are still intact," said Shane Oliver, of AMP Capital Investors in Sydney.

Some analysts say there are signs of a slowdown in China's economy, the second biggest in Asia, which may cause investors to sell mining and metals stocks.

China's industrial production rose at a slower pace in July, suggesting Government restrictions on property development and expansion in industries including steel and cement are having an impact.

Industrial output increased 16.1 per cent in July, less than the 16.8 per cent in June, the Beijing-based National Bureau of Statistics said last week.

"Bank lending is one of the best indicators," said Jonathan Anderson, chief Asia-Pacific economist at UBS in Hong Kong.

"It was up 25 per cent year-on-year at its peak and now it's down to 13 per cent."

He said Premier Wen Jiabao took measures to curb growth in the real estate and steel industry and "everywhere they've targeted is slowing quite significantly".

Falling imports were another sign of a slowing economy.

Last week, the World Bank said China's economic growth would fall to about 8 per cent in 2006 from 9 per cent this year as domestic demand declined.

China's fixed-asset investment grew 27.7 per cent in July, led by spending on oil refineries and coal mines. Investment in June climbed 28.8 per cent.

"The Chinese growth story is slowing, and the industrial and fixed asset investment looks to be the last leg of an unsustainable buildup," said Atul Lele, of White Funds Management in Sydney.

Still, in the first half of this year, China's economy managed to grow 9.5 per cent, matching the rate of the past two years. The building of power generation capacity, highways and railroads, as well as infrastructure ahead of the 2008 Beijing Olympics, continues to drive the economy, fuelling demand for commodities including oil, coal, steel, copper and rubber.

Rapid expansion in China has outstripped the ability of manufacturers to meet demand. China brought on stream 30 per cent less power generation capacity than expected in the first half.

"That's because some of the power equipment suppliers weren't able to meet orders," Wang Yonggan, secretary-general of the China Electricity Council, said.

China plans to spend between 200 billion and 240 billion yuan (US$25 billion to US$30 billion) a year increasing power capacity in the next five years, up from 160 billion to 180 billion yuan in the previous five, said Han Feng, from a research affiliate of State Grid of China.

- BLOOMBERG