China: Black Hole of Raw Materials

China, dubbed “the factory of the world,” is absorbing raw materials like a black hole, raising concerns over a raw material crisis—a crisis originating from China by which prices of raw materials such as steel, coal and raw rubber surge.

According to the Korea Importers Association (KOIMA), cast iron price steeply rose to $263 per ton, a 64 percent increase compared to a year ago. Raw rubber price rose 48 percent, and nickel by 97 percent over the same period. Prices of most other materials also increased except a few materials including raw sugar and soft coal. Every month, KOIMA researches the prices of 30 types of raw materials.

“Raw material prices are surging as China, whose economy is growing by eight percent annually with the recovery of the world economy, imports steel, crude oil and other materials in large quantities,” said Park Cheol-hong at KOIMA.

Some observers say a continuous rise of raw material prices will have a negative impact on local companies’ profitability and overall domestic prices.

China’s demand for raw materials is expected to continue to increase as the country will hold the Olympics in Beijing in 2008 and is now actively taking on a development plan of the eastern and northern parts of China, which have comparatively been underdeveloped so far.

“China’s investment in fixed assets increased by 30 percent last year,” analyzed a senior researcher at Samsung Economic Research Institute, “And the imports of raw materials increased as a natural course because most investments were focused on the manufacturing sector and social overhead capital, not on the service industry.”

Demand for steel and crude rubber saw a substantial rise in China as General Motors and Honda began to churn out cars in Chinese factories.

According to a statistic from the steel industry, China imported 146 million tons of steel last year, a record 30.9 percent rise from the previous year.

Global steel and coal prices rose 20 percent along with the surge in demand for steel in China. Such steep rises are the first in 25 years.

As the prices soared, POSCO declared price increases for steel products from February 9, and Dongkuk Steel Mill Co. said it will raise the steel price by 49,000 won per ton from January 27.

The rise in delivery prices is another factor behind the surge of raw material prices.

The BDI (Baltic Dry Index) soared to 5762 on Monday because China uses most of the bulk carriers, ships used for delivering raw materials. The BDI rose to the 1000 level in August 2002 and has continued to rise to 1900 in August 2003, 2400 in September, and 4000 in December.

“Securing cargo ships can be compared to a war as most of the ships that deliver steel are bound for the Chinese market,” said Oh Dong-soo, an executive at Hyundai Merchant Marine.