China’s Consumption Revolution

HOWARD HUMPHREYS: China announced on Monday a reduction of its growth target to 7.5 per cent, from the previous target of 8 per cent, which has been in place since 2005.

China’s ambition for the coming years is to improve the quality as well as the quantity of its economic growth; in other words it wants to increase domestic consumption.

The recent decision to widen the currency’s trading band largely reflects this move as well; as low interest rates (required for the lower yuan) boost investment, which, in turn, ‘crowds out’ consumption.

The big question is, however, not what impact the lower growth rate will have on your portfolio, but how do you position your portfolio for higher Chinese domestic consumption?

In the early stages of economic development, growth is driven by infrastructure and building development so that ‘early cycle’ metals, like construction steel used in rail and housing, are demanded in elevated levels.

Beyond the initial construction and development boom, there is just replacement demand for these commodities, as buildings need upgrading and rail replacing.

But later in the development cycle, economic growth moves from being driven by infrastructure spending to consumer spending; around 70 per cent of the United States’ economy is accounted for by consumer spending, whereas in China, that number is just 35 per cent.

As a result of growing income, China’s 1.3 billion or so individuals will demand those essential modern consumer goods, like iPhones and other electronics.

What goes into all of these electronic goods you may ask? Solder.

And, with the advent of lead-free solder, this means tin.

In 2006, Indonesia, the world’s largest exporter of tin, declared it would overhaul its tin mining industry.

On 23 February 2007, a number of harsh new measures came into effect to tame ‘informal’ tin mining (mainly small-scale alluvial operations).

Many of these, and subsequent, measures, including environmental permits, advance payment of royalties and metal purity requirements, are standard in countries like Australia.

As a result of these regulatory changes, a number of other reforms since, and declining onshore mine reserves, Indonesia’s mine production is well below the high seen in 2007.

Outside of Indonesia, China, the world’s largest miner and refiner of tin, has been a net importer (on an annual basis) since 2008.

Meanwhile, many companies are effectively boycotting Central African tin, due to its conflict status.


Indonesian Tin Mine (Primary) Production. Source: USGS Mineral Survey, Tin

The result of tight supply and strong demand growth has been persistent market deficits, with the recent exception of 2009 (12,900 tonne surplus).

In response to higher prices, tin miners and smelters have expanded existing operations.

Historic operations are also being re-evaluated and exploration activity has increased.

But few of these developments will make a meaningful supply contribution late 2013 or 2014.

On the balance, we believe that a lacklustre supply growth will continue to result in tin market deficits in the near-term.

But in the longer-term, we hold that strong consumption growth in China will ultimately translate to even stronger growth for ‘late-cycle’ metals, such as tin.

This change in China’s development cycle should ensure that market deficits for tin will continue.

The future looks bright for tin, despite a drop in China’s official growth rate target.

Howard Humphreys
Director & Research Analyst