Booming China Devouring Raw Materials

The Great Consumer

Once a major coal exporter, China is now consuming almost all of its production, putting pressure on the global supply.

"We were blindsided by the sudden surge in demand," said Peter Coates, chief executive of Xstrata Coal, a primary shareholder in Port Waratah Coal Services Ltd., which owns and operates the loading terminals at Newcastle, 100 miles north of Sydney.

"How many people in the world were able to forecast the massive commodities boom in China? Suddenly, around the world, stockpiles of everything from copper to coal disappeared."

Recent weeks have brought talk of a possible slowdown in the raw materials trade as Beijing enacts measures to cool its potentially overheating economy. But even if the pace slows, those engaged in the commodity and shipping trades are generally convinced that China's impact is here to stay.

"China's got too much of an engine going to stop," said Rex Littlewood, general manager for Asia Pacific for Noble Australia, an arm of the Hong Kong-based shipping and commodities giant Noble Group, which annually ships 6 million tons of coal out of Newcastle. "When you've got 1.3 billion people, they require a lot of electricity, especially once they've got a light bulb and an air conditioner, a toaster and a rice cooker."

In April, coal was being loaded at Newcastle at an annual rate of 86 million tons, according to David Brewer, general manager of Port Waratah Coal Services -- a pace about 20 percent ahead of 2003.

The loaders at the port -- giant swing-arm contraptions that use conveyor belts to spill coal into cargo holds -- can handle as much as 89 million tons per year. But storage space is tight, making supply dependent on the Pacific National Pty Ltd. rail system -- which is "running flat to capacity," according to Peter Winder, vice president of the railway's coal division.

Exacerbating the queue is the fact that coal is increasingly carried by smaller vessels. The giant bulk freighters, so-called Capesize vessels that can carry as much as 200,000 tons, are locked into long-term contracts with steel mills that need iron, particularly Chinese mills now casting as far as Brazil for raw material. As a result, more coal is shipped in vessels that carry 60,000 to 80,000 tons.

Coal has never been an easy business to forecast. As producers seek to tailor their investments to anticipated supply and demand, they must assess the production prospects at new mines in places such as Indonesia and Colombia as well as potential labor strife and weather that could reduce output.

Now China has made things even more volatile. Far from transparent and ruled by a Communist Party government, it has policies that are often hard to discern, and they can shift abruptly by fiat. Even minor changes within the vast country can dramatically alter global supply and demand.