China Continues to Push Asian Project Growth Margins for 2007

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Researched by Industrial Info Resources (Sugar Land, Texas). Forecasts for Asia require the survey of vast territories, which are the home to countries with widely varying resources and capacities to exploit those resources. An attempt to look into the short-term future should take a scale of economic and political factors into account to index as to where each country or region is in terms of development status and the ability to catch the wave of opportunity or weather the tougher economic conditions.

‘Developing’ Asia includes China which, according to the Asian Development Bank (ADB), carried a weighting of about 37% in terms of regional income. Although growth dipped fractionally below 10% in 2005, booming exports and investment continued to propel demand and growth of industrial output accelerated. In India, which combined with South Korea, pulls a weight of 30% of regional income, growth moved up to 8.1% underpinned by strong performances in industry and services and a rebound in agriculture from a weak performance in 2004, reports the ADB. Korean growth slipped in 2005, but consumption demand recovered in the latter part of the year to lift the annual average to 4%. The IMF (International Monetary Fund) has Korean growth at 5% in 2006, flattening to 4.3% in 2007.

Japan’s economic recovery moved growth up to 2.7% in 2005 and investment grew by 4.3%. In an environment experiencing a pickup of domestic and external demand, and considerable pent-up consumer spending from the years of deflation, the Japanese economy is expected to grow by 2.9% in 2006. In 2007, a growth rate of 2.4% is predicted as the momentum of recovery subsides and the long-term potential ‘mature’ growth rate for Japan is seen settling at 2%.

In Southeast Asia, growth is forecast to stay steady at about 5.5% in 2006 moving up a notch to 5.7% in 2007. Continuing high oil cost and firming interest rates could dampen consumption in several of the larger economies. Investment in the region is forecast to pick up. Thailand (with a possible qualification on return to democracy after the military coup) is expecting a growth rate of 4.6% in 2006 moving to 5.5% in 2007 with increased spending on mega projects. Malaysia will move from 5.5% to 5.8% in 2007 driven by robust indicators including public spending on projects at the start of the Ninth Malaysia Plan. The Philippines could see a rise from 5% to 5.3% in 2007 with better weather and rising investment. Export dependent Singapore will see a fall from 6.1% to 4.6% in 2007.

Vietnam, the new Asian tiger cub, is expected to see growth consolidate around 8% in the next two years with sustained expansion funded by FDI (foreign direct investment), private remittances and tourism income. Exports will be assisted by the country joining the WTO (World Trade Organization) and by market oriented reforms. Cambodia, with growth of 6.3% and Laos with a rate of 6.5%, based on hydropower project investment, both continue in a positive mode. In the medium-term, 2006-2010, Indonesia is expected to grow by an average of 6% per annum if the investment environment continues to improve.

The East Asian region’s growth rate is expected to move from 7.7% in 2006 to 7.1% in 2007. Growth in China could slow from 9.5 % to 8.8% in 2007. In the 11th Five-Year plan, the government has set a cooler target of 7.5% for the period, which is seen as unlikely to happen with the strength of investment and social drivers in the economy. Actual growth is expected at around 9% for the period, even with the government hoping/striving for a more balanced equitable and sustainable growth pattern. Korea is expected to move from 5.1% to 5% and Taiwan will move beyond 4.4%. Hong Kong will slow from 5.5% to 5% and Mongolia will move down from 6% to 5%.

In South Asia, growth is expected to rise from 7.3% in 2006 to 7.5% in 2007 with India and Pakistan as the drivers. After slowing to 7.6% in 2006, India will pick up to 7.8% backed by the industrial and services sectors. India’s medium-term growth is expected hit 8% to 8.5%. Pakistan will hold on to a rate of 6.5% in 2006 and 7% in 2007 with infrastructure project development a key challenge in the medium-term. If another drought does not hit, Afghanistan could see growth of 11.7% and 10.6% in 2006 and 2007, with some FDI and public loans replacing aid.

Central Asia will move down marginally from10.9% to 10% in 2007, with the exception of Azerbaijan’s exceptional growth of 25.6% in 2006 and 26.4% in 2007 riding on increases in oil and gas production. Cooperation (as opposed to non-cooperation and reflex competition and internal non-transparency in politics) between states in the region is seen as a key to raising per capita income and the Kazakhstan-Kyrgyz Republic-Tajikistan grouping is currently seen as the most likely to benefit from cooperation and show other states in the region the way.

GDP growth in the Middle East will hit 5.8% in 2006 and 5.4% in 2007, according to the IMF. This is 10% up on the global growth forecast for 2007. The rate is well above that for the world’s mature economies and is underpinned by a spate of major projects in the oil and energy fields, which are beginning to spawn more domestic downstream industrial projects in the region’s states, including steel making and manufacturing and mineral exploration and mining. Government backed initiatives are strong in the minerals sector in Saudi Arabia with international project investors looking at prospects with growing interest. The country is investing $11.9 billion through 2011 in various metals and minerals projects. These projects are promoted mainly by the state’s Maaden minerals company and also by the private sector. These include the Ras Al-Zhor project, Zubera Bauxite, Jalamid Phosphate and the Jubail Aluminum smelter.

Energy project investment will be the driver of other sectors and investment in social infrastructure, education and training has been moved onto the front burner by states looking for constructive long-term investments for their oil windfalls.

The Arab Petroleum Investment Corp (Apicorp) reported that $395 billion will be needed in the Middle East and North Africa (MENA) over the next five years to increase oil production capacity. This investment estimate is 52% up on the previously published figure of $260 billion. The Apicorp report said that each link of the hydrocarbon supply chain reveals a greater increase in the downstream sector, most dramatically in the oil-based refining and gas-based petrochemical and fertilizer sectors.

Past MENA regional surveys show that rising capital investment correlates with an increase in number of projects. Currently, the number of projects has leveled off showing that the investment upsurge is due to changes in the scope and scale of projects and soaring costs across all types of project. Higher prices for industrial raw material inputs are a significant factor in rising costs. Tightness of supplies in steel, cement and other basic building materials push costs beyond normal inflation levels. And, the report adds, the scarcity of skilled labor has added significantly to the cost of recruiting and retaining personnel.

Steel, iron ore, and metals and minerals production and manufacturing are the upstream and mid stream commodities on which global project construction is based. World steel production is set to top 1.2 billion tons in 2006 and snapshots of Asian and global production statistics in these fields indicate to the direction of global industry in 2007. In August 2006, production was running at an 11% higher rate than in 2005 and China accounted for 36% of global crude steel production. Excluding China, world production rose by 7.9%. the IISI (International Iron and Steel Institute) reported. In August, China produced 36.7 million tons (mt) (up 17%); Japan 9.6 mt (up 4.1%) and South Korea 4 mt (up 5.7%). The combined total of 50.3 mt for the month gave the three countries 49.5% of the world production total of 101.6 mt. For the first eight months of 2006 there was a global increase in steel production of 9.6%.

In 2004, China was a net importer of 13 mt of steel and has moved to exporting an estimated net 18 million tons in 2006. This 30 mt plus swing to exports is shaking world markets and cuts by the Chinese government of tax rebates to steel exporters is not expected to inhibit the continued expansion of foreign markets where there are rumbles about ‘dumping’. In August, China’s iron ore imports were up 42.1%, with the main suppliers being Brazil – 7.74 mt and South Africa 1.53 mt. In the first eight months of the year ore imports were up by 24.5%.

Further indicators of China’s consumption growth driving the margins of global markets are figures released by the National Bureau of Statistics for metals production for the first eight months of 2006: Copper 1.912 mt up 22.9% year on year; Lead 1.711 mt up 17%; Zinc 1.974 mt up 13.8%; Tin 93.7 thousand tons up 19.9%; Nickel 65.23 thousand tons up 5.2%; Aluminum 5.833 mt up 18.2%; Alumina 8.331 mt up 51%. Set against these figures, India’s steel (about 3.5 million tons per month) and metals production is only at the beginning of a concentrated expansion phase. In the first five months of 2006 the country’s aluminum output rose 19.7% year on year to 460,165 thousand tons, but with new steel and metals projects underway, this volume and growth rate should show a strong upward move through 2010.

The Indian steel ministry is basing demand projections for iron ore on a domestic steel production target of 150 mt per annum by 2020. This exceeds the 110 mt level projected for 2020 in the National Steel Policy 2006. The ministry is seeking a cap on iron ore exports at 90 mt per annum, which should be tapered off as new steel production capacity kicks in. Other planning bodies and economics ministries are fighting the export cap.

This type of forward planning is evident in initiatives coming out of India and China as they battle for energy and resource security and global profiles concomitant with the sheer size of their ongoing industrial growth. There are potential areas of cooperation between the two just as much as there are potentially damaging areas of competition which need resolution.

We had the Asian Tigers in the 1980s, now we have the Asian Gorillas plus some new tiger cubs like Vietnam on the scene. If there is going to be any relative slowdown in global economic conditions over the next two years, the growth of domestic consumption and the degree of restructuring and medium to long-term planning in many Asian countries could carry more than average growth rates through the downside.

Industrial Info Resources (IIR) is a Marketing Information Service company that has been doing business for over 23 years. IIR is respected as the leader in providing comprehensive market intelligence pertaining to the industrial processing, heavy manufacturing, and energy-related industries throughout the world.