“China’s energy demand will rise about 4 percent every year to the equivalent of 2.7 billion tons of standard coal by 2010, the government forecast on April 10,” Bloomberg reports today. “The nation gets 78 percent of its electricity from coal, prompting companies including China Coal to expand production as prices increase. Domestic coal contract prices increased by as much as 10 percent, or an average of 20 to 30 yuan a ton in 2007.

Output will be little changed at 80 million metric tons of coal this year and increase 50 percent to 120 million tons in 2010.”

Gee that’s a lot of coal. You can imagine that in addition to increasing its own production, China will also continue to be a buyer of Australian thermal and coking coal. You can also expect more anxiety over what all that coal (and carbon) means to the planet. But what kind of cycle are we dealing with here?

Is China’s growth contingent on U.S. consumption? If so, then China’s growth cycles will be highly correlated to U.S. demand and U.S. interest rates. The two economies will remain linked, and China’s voracious consumption of Australian resources is merely a function of America’s voracious consumption of manufactured Chinese goods, which in turn is merely a function of America’s record-low saving and record-high debt levels and record-stupid monetary policy. Can global growth really rely on the stupidity of America’s central bankers?

No one ever looked foolish underestimating the idiocy of central bankers, but…

There is another explanation that suggests China’s resource-intensive boom, though linked inextricably with American consumption, is also part of a larger, longer, and more powerful economic cycle, maybe the last big resource-intensive cycle of its kind in the history of this planet (good thing we’ve already got another planet queued up for development.)

In other words, according to this second, mega-historical explanation, China’s boom is not just a very large symptom of the global credit boom, but the emergence of a large feudal, agrarian economy into a large industrial economy. It is like Team America’s emergence onto the global economic stage, but multiplied times ten.

If that’s the case, it means China’s growth is really just beginning. Ditto for India. And it means the bull market in resources may last much much longer than any of us expected. Indeed, the only real limit is that there may not be enough oil in the world to produce refined fuels for the 140 million cars analysts predict could hit Chinese roads  in the next twenty years (perhaps this is why China is trying to produce transportation fuel from
coal.)

Come to think of it, is there enough water to grow the crops to feed the animals to supply the protein a hungry world needs? Is there enough copper in Chile or iron or in the Pillbara to turn China’s eastern seaboard into one giant home for 500 million people? How many air conditioners will it take to keep the place cool? How many lights will have to turned on so you can see in a place where smoke from coal-burning fire plants blots out the sun? Will Africa become a giant raw-materials colony for China? Or is not just Africa but Canada, Australia…and anyone else who has in abundance what China needs to geep growing?

Of course, these kinds of massive projections are also exactly the kind of garbage people say to convince themselves to buy stocks at the top. Resource markets are always cyclical. And there’s no reason to believe this one will be any different. Still, we are nearly convinced that we may have seirously underestimated the duration, intensity, and historical significance of this cycle.

How? Well, strong Chinese demand has not been self-correcting. Rising resource prices have not yet swamped the market with new producers of raw materials. It takes a lot of money and expertise and labour to produce more iron ore, coal, or gold. While the money is abundant these days, labour and expertise are not, especially in places like Western Australia and Queensland, where the resources happen to be located.

This means that prices can stay higher for longer than in past cycles. Again, we cringe at arguing with the evidence of the past that cycles always turn. But we are merely exploring the prospect that this migration of wealth from West to East may be far more massive than we were thinking. It’s not just a matter of a few people shifting portfolio allocations to have exposure to Eastern markets. It’s a shift in the economic center of gravity of the global economy, and it leaves Australia in an immensely enviable position.

Dan Denning
The Daily Reckoning Australia

© 2007 Dan Denning
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Dan Denning is the editor of The Daily Reckoning Australia. He’s also the author of 2005’s best-selling The Bull Hunter (John Wiley & Sons), and spent five years as editor of Strategic Investment, one of the most respected “big-picture” investment newsletters on the market.
www.dailyreckoning.com