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Economists play up China factor

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by Daily Commercial News last update:Jul 14, 2008

Developers and contractors who are wondering why steel and other commodity prices are high, only have to look at the China’s phenomenal industrial growth.
Economists play up China factor

CanaData’s construction forecast conference



Developers and contractors who are wondering why steel and other commodity prices are high, only have to look at the China’s phenomenal industrial growth.

That was a reoccurring theme that emerged during the speeches of three economists at the recent CanaData Construction Industry Forecasts Conference in Toronto.

Those economists were Jeffrey Rubin, chief economist and chief strategist with CIBC World Markets; Patricia Mohr, vice-president, economics industry and commodity market research, the Scotiabank Group; and Alex Carrick, chief economist, Reed Construction Data.

Participants at the conference might have been at least temporarily reconsidering the type of car they drive after Rubin’s somewhat alarming analysis of the connection between China’s industrial growth and the world’s dwindling oil supplies.

“Global demand for oil is going through the roof. Conventional oil reserves are less than one million barrels and the oil-producing nations have little room for expansion. Why is this (demand) happening? There’s no mystery about it,” said Rubin, citing the explosion in industrial growth in China, India and other emerging Asian nations, which now accounts for 50 per cent of the demand for the world’s oil supplies.

“China’s demand alone is 40 per cent. It’s now the world’s second-largest importer of oil (after the United States.)”

That will have serious profound impacts for the North American economy, said Rubin, who predicted that $50-a-barrel oil prices could continue for six months or even longer if industrial growth doesn’t slow down.

“When oil prices soar, all commodity prices are impacted as well.”

Rising oil prices, however, are probably better for the economy than rising interest rates, he said.

“What happens if interest rates don’t stay at a 40-year-low? The U.S. economy is illequipped to weather interest rate hikes,” said Rubin, citing its high level of bankruptcies, high-priced real estate and its slide from a creditor nation with a $120-billion surplus to one with a $500-billion deficit within four years.

“That’s the largest fiscal deficit in world and it will be a drag on the economy.

“I believe interest rates will soon fall and oil prices increase,” said Rubin, pointing out that’s not a view held by many economists.

“Economists instinctively dismiss the concept of depletion . . . the very notion of depletion is difficult for economists to get their mind around.

“In January as oil prices climb, you won’t be hearing any more about interest rates,” said Rubin.

China increasingly drives global commodity markets and commodity prices probably won’t peak until next year, said Patricia Mohr later in the conference.

But its need for commodities such as copper does benefit Canadian producers such as Inco and Falconbridge, said Mohr, who expects China’s expansion will slow down next year to prevent an overheated economy.

Similarly, political unrest in oil-producing nations such as Nigeria and Venezuela, fighting in Iraq and the financial problems of Russia’s beleaguered Yukos oil company all work in favour of Canadian oil and gas producers, said Mohr, citing ongoing oilsand projects and the proposed Mackenzie Valley pipeline. “Canada is a secure politically.”

There’s record oil and gas drilling activity in Western Canada and Canada’s oilsand exports have hit 485,453 barrels a day so far this year, compared to just over 298,100 in 2000. Major oilsand projects are also scheduled for completion in 2006, 2008, 2010 and 2012-2015, with 75 per cent of those between 2004- 2010, said Mohr.

“However, labour shortages and potential cost overruns may delay some projects,” she said.

In his presentation, economist Alex Carrick also agreed China’s industrial expansion is driving up commodity prices, especially the prices for construction materials.

“The Chinese know their economy is overheating. But they’re also heading into the (2008) Olympics and they will want to showcase (their country).”

Carrick’s comments were part of farreaching overview of the current status of the Canadian construction market and where it might be headed in the next few years.

Housing starts are beginning to pass their peak and will probably reach about the 220,000 mark this year and then drop to about 190,000 in 2005.

Much of the pent-up demand for housing that was accumulating during the 1990s has been met following three “really strong” years of housing growth, he explained.

As for other sectors, Carrick said employment creation and the improved confidence that generates should stimulate some retail building construction.

Commercial hotel occupancy rates are also higher than last year. But the combination of the lingering impacts of the SARS outbreak, lengthy border crossings and the unwillingness of American tourists to travel as extensively as they have in the past is working against the hospitality and tourism industry, he cautioned.

Office building construction will bounce back in a few years. But the amount of square footage required per employee will be less than it has been in the past.

Commercial construction, as with all construction, is cyclical in nature, said Carrick.

last update:Jul 14, 2008

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