China Hedges Bets, Gobbles Up World's Resources

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). It has hardly been a secret to anyone who listens to the news that China has grown exponentially in every aspect in the last decade, or that every nation on the planet is underwriting it in one manner or another. But nobody seems to notice, as long as we have enough electronic gadgets to keep us entertained and to create a smoke screen, so we won't have to think about the ominous facts that are stacking up daily. One doesn't have to read the tea leaves to see where we're headed.

As far as Western powers go, Canada has not hesitated to jump into the tar pit along with the rest of us. In January of 2005, Canadian Prime Minister Paul Martin and Chinese Premier Wen Jiabao signed the 13-point Statement on Energy Cooperation in the 21st Century, thus opening the door to virtually unlimited trade with China.

China's two largest oil companies, PetroChina Company Limited (NYSE:PTR ) (Beijing) and SinoPec Group (China Petrochemical Corporation)(Beijing) have contracted to purchase oil from the Athabasca oil sands projects, which could yield over two million barrels of oil day (bpd) when fully developed.

China is aggressively pursuing buying controlling interests in power, oil and gas, and metals and minerals, and whatever else it can get, to assure its resource demands will be met over the long term. China MinMetals has negotiated to acquire a controlling interest in Noranda (NYSE:NRD) (Toronto, Ontario), Canada's mining and resources giant. It is also seeking power companies to buy up.

Over 100 individual trading agreements have been signed between Canada and Chinese companies, in oil, energy, resources, technology, and agriculture. The agreements have laid the groundwork for a new 720-mile, 400,000 bpd oil pipeline under construction from northern Alberta to the British Columbia coast, to service primarily Chinese oil demands. Eighty percent of that oil is destined for China.

Canada's energy giant Enbridge Incorporated (NYSE:ENB) (Calgary, Alberta) has offered state-owned Chinese interests a 49% ownership in the pipeline.

So what does this mean to the U.S.? Precisely this: once China becomes dominant in the world oil market - and it's well on its way - the U.S. will lose its bargaining power with the OPEC and other oil-producing nations, and gas prices will rise even higher, as China shows that it is both willing and able to overpay for all available oil globally. Canada's deals with China mean that there will be even less chance the U.S. will ever become less dependent on the Middle East for its oil.

In yet another coup, PetroChina has recently bought the overseas assets from its parent, China National Petroleum Company (CNPC), giving PetroChina 50% ownership in Newco, a CNPC subsidiary, along with access to Newco's oil and gas assets in ten foreign countries, including Algeria, Azerbaijan, Canada, Chad, Ecuador, Kazakhstan, Niger, Oman, Peru, and Venezuela. PetroChina, which engages mainly in oil and gas exploration and production in Indonesia, will become a wholly-owned subsidiary of Newco, which will then have consolidated international reserves of 866 million barrels of oil equivalent, an 879% increase from the current 88.5 million barrels. PetroChina has now become Asia's largest company by market value, overtaking Toyota Motor Corporation.

Nor has China overlooked Canada's iron, steel, aluminum, and nickel resources. The agreement includes huge stores of natural gas and uranium, which China needs for the 27 new nuclear plants it is building. China, through its Noranda purchase, now owns a big chunk of Noranda subsidiary Falconbridge Limited (TSX:FL) (Toronto, Ontario), a large miner of nickel (vital for national defense), copper, cobalt, platinum, and zinc. Globalization is definitely a two-edged sword.

Besides the Canadian deals, China has signed 48 other oil deals with countries all over the world. At this writing, and closer to home, China, through its (CNOOC) (NYSE:CEO) (Beijing), a subsidiary of China National Offshore Oil Corporation Limited, has been aggressively pursuing the takeover - a hostile takeover, if necessary - of U.S.-based Unocal (NYSE:UCL ) (El Segundo, California), which has raised a lot of interest and resistance in high places in the last few weeks. CNOOC has now hired a U.S.-based takeover specialist to rev up its campaign.

In the manufacturing area, China now has over 300 automotive assembly and components plants, and many more coming soon. The U.S. textile and furniture industries have long since abandoned their U.S. manufacturing operations and set up shop in China, where employees work 14-hour days for the equivalent of about $100 a month. And the Grinch-like, Wal-Mart (NYSE:WMT) (Bentonville, Arkansas), is now China's fifth largest trade partner, dwarfing your friendly Dollar Store's contribution to the national debt. And for anyone who still thinks they're saving money by shopping at Wal-Mart, consider for a moment that the American taxpayer is actually underwriting Wal-Mart by paying for its employees' healthcare costs.

The U.S. trade deficit with China now stands at $1.5 billion a day. If China should decide to call in its debts, there wouldn't be enough dollars existing in the whole world, including in Japan's and Germany's coffers, to pay the national debt. Maybe there is an up-side to Alan Greenspan's having government printing presses run 24 hours a day to turn out ever more funny-money. We'll need it to pay that debt, and the more dollars there are, the less they're worth.

What is driving this Chinese-driven feeding frenzy on the world's oil and other natural resources? First, there is the runaway growth of the manufacturing industry. Very little is left of the U.S. textiles industry, which at one time was practically the backbone of the country, along with the automotive industry. The lion's share of the furniture sold in the U.S. comes from China. Even your Levi jeans were made in China - Levi packed up manufacturing operations a couple of years ago and moved to China. Too bad, cowboy.

Secondly, the phenomenal internal growth that China has experienced in the last few years has required more oil and other resources. Infrastructure in the form of paved roads, railroads, cross-country pipelines, 27 nuclear power plants, massive irrigation projects, all have contributed to China's rapacious appetite for raw materials. In 1989, China had only 170 miles of paved roads in the whole country, and now it has 18,500 and expects to have 50,000 by 2008 (assuming the world can keep up with its demand for concrete). China now uses 55% of the world's cement.

Some other eye-opening statistics are that China used 66% of the world's iron ore, 40% of the world's steel, 30% of the world's coal, 20% of the worlds copper, and 19% of the world's aluminum (brace yourself, Alcoa, and take note of what Toyota is doing - protecting the company from a hostile takeover - because China is showing all the signs of becoming more and more aggressive in its bid for resources, and it has the cash to back it up).

The third reason for the increase in China's demands for resources is, ironically, the rise of consumerism. Along with all the new jobs created by the transplant industries has come a modest, but growing, middle class, which is demanding more and fancier consumer goods. In 1997, there were only 700,000 automobiles in the country, and today there are seven million. All those cars require more highways, more petroleum products, more electricity, and as more people become empowered by their new-found wealth, they, too will demand more cars. At this time, China already is showing signs of automotive production surpluses, but, like Detroit, they keep producing.

On another front, one might note the number of Chinese companies coming into the U.S. and setting up manufacturing companies, usually with American-sounding names, to avoid any backlash of public opinion. Not only that, they seem to have mounted a full frontal attack against established American industry. They've recently bought out the Maytag Corporation (NYSE:MYG ) (Newton, Iowa), one of the U.S.' largest appliance manufacturers, whose out-of-a-job repairmen probably won't feel so lonely, once the Chinese take over. What next? General Motors?

China's economy has now eclipsed that of Germany and will overtake Japan's in a year or so. It's good for the people of China that the country has finally discovered that it can use the principles of capitalism to its own benefit. However, it seems at this point, that it might have learned the lessons of capitalism too well... and will use them to dominate the whole world. It will be interesting to see if China will be able to contain unbridled capitalism any better than the West has, or if it will also be devoured by the machine it created.

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