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Damp squib or next commodity super-cycle? The Belt and Road dilemma

https://www.reuters.com/article/column-russell-china-beltroad/column-damp-squib-or-next-commodity-super-cycle-the-belt-and-road-dilemma-russell-idUSL4N1RH38Y

Damp squib or next commodity super-cycle? The Belt and Road dilemma: Russell

Reuters Staff

(The opinions expressed here are those of the author, a columnist for Reuters.)

* GRAPHIC: China's BRI initiative: tmsnrt.rs/2njAVmw

By Clyde Russell

HONG KONG, April 4 (Reuters) - China’s Belt and Road Initiative (BRI) is one of those rare things that virtually everybody seems to have heard about, but equally, very few people can actually claim to have a detailed understanding of what it means.

This dichotomy was in evidence at the Belt and Road conference, hosted by Mines and Money, in Hong Kong on Tuesday, with views ranging from the BRI will be the driver of a new super-cycle for commodities to that it’s more of a marketing slogan aimed at boosting the image and influence of the government in Beijing.

On the side of thinking of the BRI as a sort of a Marshall plan for Asia, Africa and even Europe are a set of impressive sounding numbers, which dwarf the scale of the U.S. initiative that helped to rebuild Europe after World War II.

The heart of the BRI is effectively building vast numbers of infrastructure and energy projects across at least 70 countries that are home to a total of 65 percent of the world’s population and some 40 percent of its economic output.

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The centrepiece of Chinese President Xi Jinping’s economic programme also involves developing the mines and oil and gas fields necessary to supply the raw materials for this vast undertaking.

For its supporters, the BRI is the vehicle by which less developed countries will supercharge their growth and lift their populations out of poverty.

Asian countries need to spend $1.7 trillion annually on infrastructure in the coming years, more than double the current investment rate, Rani Jarkas, chairman of the advisory firm Cedrus Group, told the Hong Kong event.

It’s these sort of numbers that are getting commodity investors and producers excited, as that level of spending will require huge amounts of iron ore for steel, coal for making cement, and metals such as copper and zinc.

NAME YOUR TOP BRI PROJECTS

But just as the big picture sounds very encouraging, scratching below the rhetoric reveals that the BRI may not be quite as big a deal as many expect.

One of the questions I have posed at several conferences and events where the BRI is a focus is to ask the audience to think of their top five BRI projects, what they know about them and how much they will add to commodity demand.

This causes most people to stumble, and bear in mind that the attendees at these events are drawn from the resource sector, either as producers, traders, buyers or financiers.

What becomes apparent is that the BRI is currently more of a high-level political initiative that China is using as a diplomatic tool to expand its influence, especially in central, south and southeast Asia as well as Africa.

There doesn’t appear to be a coordinated strategy for building the land transport corridors linking China to Europe through Asia, or for the maritime projects that take in Africa as well.

What emerges is that Chinese companies, both the large state-owned enterprises (SOEs) and smaller companies are using the BRI initiative as a vehicle when seeking investment opportunities.

These opportunities still seem more focused on meeting the needs of the Chinese companies, rather than as part of a policy-driven effort to develop the BRI target countries.

China trade war fears spark U.S. stock sell-off

The flagship vehicle of the BRI, the Asian Infrastructure and Investment Bank (AIIB), started operations from its Beijing headquarters at the start of 2016, so it’s somewhat unrealistic to expect it to already be a major factor driving BRI investment.

It has approved $4.26 billion in loans so far, according to data on its website, and although that’s somewhat more than small change, it’s also a far cry from the trillions of dollars in investment that those backers of the BRI say will be delivered.

It also appears the case that virtually any Chinese foreign investment, with the exception of property, is being classified as related to the BRI.

This helps make it look like the BRI is something significant, rather than a collection of unrelated projects being undertaken by separate companies with little or no coordination.

However, just because the BRI seems somewhat haphazard right now, doesn’t mean it will remain that way.

“It may be the great project of this century, it may be nothing. But you have to be involved no matter what,” is how one investor put it at the conference.

For commodity producers the takeaway is that the Chinese are increasingly interested in developing resources that they believe will meet domestic needs, and those of the BRI.

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These include battery metals such as cobalt, lithium and nickel, but also copper and iron ore.

The answer to whether the BRI is indeed the start of a new super-cycle for commodities will become apparent if Beijing can successfully change the process from a slogan to a coordinated, multilateral initiative that produces actual results

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