Metal Markets? Go East Old Man!
December 16, 2008
Speaking of cars... and the future... and frameworks of thinking, I'm reminded of a story told at a conference I attended a couple of years ago.
In the early part of the last century, as this Henry Ford fellow was playing with mass production, the folks at Mercedes-Benz engaged a consultant to study whether there was, indeed, a mass market for automobiles. The answer came back as a rather pointed 'No'. The explanation was that there could be no mass market for Mercedes-Benz because there was a worldwide shortage of chauffeurs.
The point? Too many people stuck in old paradigms. As a surrogate for shifting times, current trends in the automobile sector suggest that the Chinese market will represent the next huge opportunity for both production and selling. If, and I recognize the size of that word, the Chinese economy passes by the American economy as early as 2015 (as cited by some estimates), and if the infrastructure growth there matches this general economic growth, it would suggest the 'potential' for as many as 80 million new cars to be sold in China to bring China just to the current number of autos in the U.S. This represents more than 10 times the number of autos sold in the U.S. in 2006, and 9 times the number of autos sold in China in 2007. Not saying this will happen, but the auto industry is often used as a surrogate, so I'm just playing with numbers.
Certainly, assumptions would need to be challenged here, such as the American love relationship with the automobile. This said, who's to say that the Chinese people will not also fall in love with the automobile? Who's to say that the Chinese will not manufacture and export automobiles in a very dominant way.
If the Chinese economy continues to grow at 9% (a conservative estimate, and below recent experience) and if the American economy grows at 3% (perhaps a generous estimate), and if we look at the Chinese GDP (in purchasing power parity - PPP - not nominal), at a little better than one-half of the current American GDP, the point of indifference would be reached in 2020, after which, at these rates, the Chinese economy would quickly overwhelm the American market. Remember that we're only talking about China here. India's GDP ranks 4th in the world in terms of PPP, and is second fastest in growth, behind China, at 9.1% for 2007-08.
Given the dismal state of Western economies, and the growth (so far and expected) in the East, operating any automobile manufacturing business in the United States in the current framework may only be justifiable in the very near future in a tightened protectionist market. Now, frameworks change, and we have no reason to expect the current framework not to change. This said, economies of scale and an unstoppable shift into a globalized economy leave little doubt that entry into markets like China and India (among others) on the part of GM, Ford, and Chrysler (or whatever they're called when the dust settles, if they’ve not become part of the dust, that is) will not be merely a matter of 'growth', but rather a matter of survival.
Relative inefficiencies in productivity in the West will increasingly impact on the viability of its manufacturing sector, and not favourably. The relative purchasing power of Western currencies will, in turn, be affected, also not favourably. Who wants to survive, let alone thrive, will be setting up both production and marketing activities elsewhere.
A typical automobile uses about 22.5 kg (50 lbs) of copper.
China is the world's largest consumer of copper, estimated at 4.9 million tonnes in 2008 (up 7.45% over previous year) and projected to 5.2 million tonnes for 2009 (growth of 6.12%, and representing about 30% of total world consumption). These still impressive growth rates are down from 13.4% in 2006.
Growth in production of automobiles in China between 2005 and 2006 was 32% - that's in just one year.
Growth in production of computers in China between 2005 and 2006 was 45%.
The Prius battery uses about 14.5 kg. (32 lbs) of nickel.
India accounts for about 20% of the world's consumption of gold, about three-quarters of it for jewelry. India's middle class could grow to almost 600 million people, from the current 50 million, by 2025, projected at current growth rates. Assume some growth, then, in the Indian market for gold.
The population of the United States is just over 300 million (making it the 3rd largest in the world, just ahead of Indonesia, at 229 million). The populations of China and India are greater than 1.3 billion and 1.1 billion, respectively.
Any middle to longer term projections for world markets for base metals (in the least) must look first to the East, not the West. Those who still look to the American economy to point the way for the future are looking in the rear view mirror while approaching a very busy intersection.
Cheers,
Kevin Graham