Matthew Stevens | September 08, 2007
WESTERN capitalism's ultimate victory over communism is being played out in the distant, metallic-red soil of Western Australia in a new-age Sino-Russian battle over access to essential raw materials.
Some 120 years after the last great conflict between China and Russia, new international battle lines are being been drawn, though this time the engagement will be commercial rather than military.On one side are the industrial oligarchies of Russia and Ukraine, on the other the increasingly sophisticated Chinese state-owned enterprises.
And the battleground? Anywhere there are minerals and energy resources ready to be tapped.
The coincidence of the APEC gathering in Sydney, China's signing the biggest LNG contract in Australia's short but rich gas history, a Ukrainian billionaire briefly overbidding a South African pitch for West Australian manganese and a Russian emerging as a stalker of Fortescue Metals is just too rich to ignore.
Because the forces driving PetroChina's $45 billion LNG contract with Woodside, Ukrainian Gennadiy Bogolyubov's $900 million cash bid for Consolidated Minerals and Russian Magnitogorsk's move to gain influence in Fortescue are essentially the same as those which have persuaded China's AnSteel to become a foundation financier of Gindalbie Metals' $1.8 billion integrated iron ore project.
Each of these investments is aimed at securing the raw materials of the economic revolution that will reshape the global economy of the 21st century.
China is signing cornerstone off-take and equity agreements to reinforce new gas, iron ore and nickel projects while east European predators are boldly stalking global bourses seeking opportunities in iron ore, copper, nickel, manganese, coal and even uranium.
The pent-up economic energy released by the end of Cold War hostilities began affecting resources markets about four years ago.
But from the moment China became a net importer of energy in 2005, all bets were off because the resulting surge in oil prices did not have its usual effect on metal markets.
Traditionally, economic activity slows with higher oil prices and mineral prices fall.
Instead, iron ore prices rocketed 72 per cent. And they have kept rising ever since as production has been unable to keep up with China's demand.
Just to reinforce the impact of this demand surge, I understand over recent months that BHP has dispatched three spot shipments of iron ore at prices of $US104 a tonne. Back in 2004, iron ore was changing hands in the low $US30s a tonne.
Little wonder that BHP boss-to-be Marius Kloppers told analysts as recently as last week that he is keen to sell a greater proportion of his iron ore into spot markets as opposed to the currently ubiquitous long-term contract arrangements.
Just incidentally, Kloppers suggested during one briefing that he would like to chat to fellow Australian ore exporter Rio Tinto about co-negotiations on a move to spot-trading and said such a move would be on the agenda for the next round of price talks.
At the same time, Kloppers is expected to insist that BHP's people take a hard line on securing some of the $20 a tonne freight charged by the Brazilian exporters.
But iron ore is only part of this virtuous matrix. The other core metals markets are arguably even hotter than iron ore, with copper and nickel in particularly changing hands at unprecedented prices because of the demand pressure created by China's surging needs.
And according to Australian trade economist Ross Garnaut, we ain't seen nothing yet. In a report published last month, Garnaut argued that China was nearing a structural "turning point" in its economy that could mean it was "entering a period or resource-intensive demand unique in world history".
Garnaut wrote: "The increase in China's demand for metals during the next two decades may be comparable to total demand from the industrialised world today.
"The increment in China's energy demand may be somewhat less than this, because of the exceptional conditions that support North America's current high demand."
Which means Garnaut believes global metals production will have to double over the next 20 years. And the only reason energy output will not need to grow so rapidly is that rising prices will force the energy-indulgent US to become more efficient.
That China and fellow Cold War warriors Russia and Ukraine are acting now in anticipation of this tectonic shift in demand has underscored the last week of digging and dealing in Australia.
The PetroChina LNG, for example, has more meaning for Australia than just the headline value and volume numbers.
What is really important about the 15- to 20-year contract to take 2-3 million tonnes a year of LNG is the price China is prepared to pay for a contract that will likely secure the $10 billion Browse gas project.
PetroChina is paying pretty much a market price for its gas. Which means it has agreed to pay something like three times more than China National Offshore Oil Company does under the 25-year deal secured by John Howard back in 2002.
The problem with that deal is it included no price escalators that would keep the contracts in line with real oil prices. Which meant the North-West Shelf partners get less than value over time and, worse, that China effectively locked itself out of the LNG market until this week.
The PetroChina deal at once saves face for CNOOC (which had simply refused to engage on anything but the basis of the unsustainable 2002 deal) and frees China to re-enter the race for new LNG contract volumes. Which it is expected to do with vigour over the coming year.
Which will be good news for the other partners in the Browse project (Woodside's deal involves only its share of the output) and the likes of Santos, which is seeking customers for its proposed $7 billion Gladstone coal seam gas to liquids project.
China's arrival as a serious contender for LNG will be a matter of concern to the godfathers of the LNG market, Japan and latterly Korea. But not to Russia, which is building itself a place in the export LNG trade.
Outside of uranium, energy is not such a problem for Russia. But minerals will be. Which is why Russian corporates have seriously lifted the tempo of efforts-build-ownership positions in resources plays outside of their home base.
And why it was so intriguing to see Russia's Magnitogorsk indicate its interest in building a 5 per cent stake in Fortescue Metals into a 15 per cent, or more, holding. That would imply an investment of at least $1.5 billion, at current market prices. And that sort of investment would suggest the Russians would attempt to establish an off-take agreement with Andrew Forrest's third force in Pilbara iron ore.
But China is clearly Fortescue's preferred destination for product. Every tonne of its 45 million tonnes a year of contracted volume is with Chinese customers.
Forrest, mind you, has plans to lift production to maybe 100 million tonnes a year by 2009. Which would suggest there is a fair bit for the men from Magnitogorsk to play with.
At the same time, both BHP and Rio Tinto have plans to lift production to 300 million tonnes a year. Each. Which means Australia would be exporting at least 700 million tonnes annually even before the likes of Gindalbie and the other Mid-West projects come on-stream.
So surely, then, the price will start to temper and fall? Well, maybe not.
The fact is consumption of steel and all other metals is going to be driven by the economic emergence of four countries: Brazil, Russia, India and China (BRIC).
In Russia and Brazil, GDP per capita is nearing $US10,000 ($12,100) while in China and India it is barely at $US5000. And steel consumption per capita sits at 200 tonnes or less in all four countries. Which is about 40 per cent of the norm in Western countries and 20 per cent in Japan and Korea.
It is expected then that by 2050, the 2.7 billion people of the BRIC nations will treble steel consumption, which will require that worldsteel production more than doubles.
Now the iron ore to make that happen has to come from somewhere. Brazil, of course, can look after itself, as can India. But China and increasingly Russia will look to Australia, South America and Africa for product.
And that pattern will be followed across the suite of minerals and energy resources. Which means that, as long as we can continue to stretch our hard-pressed economy by becoming ever more efficient and open to new investment, Australia could well be on the verge of a new golden era.
