ANZ

Resources, Infrastructure and Cross Boarder Trade with China

Shane Lee

Senior Economist

6 July 2011

1

Nature of Infrastructure Cycles

Global infrastructure cycle

Cycles tend to be long. Most recent upswing began in the late 1990s.

1. Usually cycle is driven by under or over investment relative to population growth.

2. Strong urbanisation is driving demand for Asian infrastructure investment. Putting upward pressure on commodity prices.

In Australia, 1. and 2. are coming together to drive the domestic cycle.

Managing the impact of the infrastructure and mining upswing on the economy is the challenge for policymakers.

2

US infrastructure cycle began picking up in the last 1990s

US Infrastructure Investment and the Real Copper Price

Source: Datastream, US BEA and ANZ

75

150

225

300

1929 1937 1945 1953 1961 1969 1977 1985 1993 2001 2009 2017

0.5

1.5

2.5

3.5

$US/ lb %Copper price (LHS)

Infrastructure investment (% GDP- RHS)

NB. The real copper price is calculated based to 1985 US dollars. Infrastructure investment is expenditure on roads

and highways, rail, airports, hospitals, telecommunications, electricity and energy.

3

Water, roads and telecommunications should benefit

Sources: OECD

(3) Only OECD countries, Russia, China, India, Brazil

(2) Transmission and distribution only

(1) estimates for 2005,2015,2025

36,9601.7917992.51897Total

18,090 1.0310371.01772Water (1), (3)

4,210 0.242410.24180Electricity (2)

8,170 0.171710.86646Telecomms(1)

1,120 0.06580.0754Rail

5,370 0.292920.32245Roads

Cumulative 2010-2030%GDP

2020-2030%GDP2010-2020

Global Expenditure Forecasts (average annual, $USbn)

(3) Only OECD countries, Russia, China, India, Brazil

(2) Transmission and distribution only

(1) estimates for 2005,2015,2025

36,9601.7917992.51897Total

18,090 1.0310371.01772Water (1), (3)

4,210 0.242410.24180Electricity (2)

8,170 0.171710.86646Telecomms(1)

1,120 0.06580.0754Rail

5,370 0.292920.32245Roads

Cumulative 2010-2030%GDP

2020-2030%GDP2010-2020

Global Expenditure Forecasts (average annual, $USbn)

4 Sources: ABS

US infrastructure investment has generally declined since the 1970’s. Some sectors have picked up, but it hasn’t yet improved asset quality.

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1929 1937 1945 1953 1961 1969 1977 1985 1993 2001 2009 2017

Rail

Water & sewerage Telecommunications

Airports

%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1929 1937 1945 1953 1961 1969 1977 1985 1993 2001 2009 2017

Highways and roads

Petroleumn

Power

%

Hospitals

Source: ABS

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

%

Rail

Telecommunications

Water & sewerage

0

0.5

1

1.5

2

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

%

Highways and roads

Energy

Power

US: Public and Private Investment as a % of GDP US: Public and Private Investment as a % of GDP

Australia: Public and Private Investment as a % of GDP Australia: Public and Private Investment as a % of GDP

Source: Bureau of Economic Analysis Source: Bureau of Economic Analysis

5

Australian infrastructure: Aging and the impact of commodity prices

15

17.5

20

22.5

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

Years

Australia: Age of Capital Stock (Structures ex Dwellings)

Source: ABS

-20

-15

-10

-5

0

5

10

15

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

%

Investment

Depreciation

Australia: (Structures ex Dwellings) Real Investment growth and Depreciation

Despite $425bn ($A395bn in infrastructure only) past 4 years age of capital stock still higher than average since 1960 (18.6 years).

Implies another $A587bn in infrastructure spending over 6 years.

Some financial impediments (State Government balance sheets, bank and corporate debt still a little expensive)

Skilled labour the biggest problem.

6

Quality of infrastructure consistent with Age and lack of investment over longer term. (Engineers Report Cards)

B

C

B-

D-

D

C-

C

B

B

D-

n/r

2001

D-

D+

C+

I

D

D

C-

C-

D-

D

D

D-

D

C

D+

2005

4

C D- Waste Water

C- D Transit

C- C+ Solid Waste

I Security

n/r C Telecomm’s D Schools

3.9 C+ B- Gas C+ D- Roads

3 C+ C+ Electricity C- Rail

C- C Irrigation C-

Public Parks & Recreation

4.1 C- C Storm Water D-

Navigable Waterways

C+ B- Waste Water D D

Hazardous Waste

B- B- Potable Water D+ energy

B B- Airports B+ D- Drinking water

C+ B- Ports D Dams

C- D+ Rail B- C Bridges

4.8 C C Roads B+ D Aviation

2005 2010 1988 2009

Asia Australia United States

Source: Engineers Australia, American Society of Civil Engineers, World Economic Forum 2008. Australia and the US are reported A-E (excellent – poor). Asia is reported 0-7

7

Long run investment requirements: Advanced economies

Asset Investment % GDP

Roads 1.0

Electricity 0.5

Water Supply & Sewerage 0.3

Telecommunications 0.5

Rail 0.2

Total 2.5

8

Emerging economies: Quality generally poor, but Hong Kong, Korea, Malaysia and Singapore good.

0

1

2

3

4

5

6

Ban

glad

esh

China

Hon

g Kon

g

Rep

ublic

of K

orea

India

Pak

ista

n

Sri

Lank

a

Cam

bodia

Indo

nesia

Malay

sia

Philip

pine

s

Singa

pore

Thaila

nd

Vietm

an

Unite

d Kingd

om

Unite

d Sta

tes

Aus

tralia

New

Zea

land

No.

Source: World Economic Forum 2009 Global Competitiveness Report. 1 = extremely underdeveloped, 2 extensive by international standards.

* Data seems to have upward bias when compared to Engineers Report Cards and public opinion in both Australia and the US

Asian Infrastructure Quality

9

Absolute change in population more important than urbanisation rates

104.8363.8318.6258.9192.8154.6101.3United States

7.226.323.219.014.410.96.3Australia

9.264.661.055.450.842.940.0United Kingdom

42.268.446.226.213.47.93.1Vietnam

18.340.431.722.116.07.83.4Thailand

0.45.15.24.63.02.11.0Singapore

56.1117.993.961.829.912.05.4Philippines

20.137.027.417.010.06.12.8Myanmar

14.734.829.020.29.03.61.2Malaysia

4.8

6.3

235.7

13.4

7.5

186.1

915.4

38.0

8.9

1027

143.3

2050

4.34.32.00.60.20.1Lao People’s Democratic Republic

9.97.73.51.21.10.4Cambodia

107.1192.7128.756.020.69.9Indonesia

4.44.73.13.02.41.3Sri Lanka

122.0119.764.134.614.86.5Pakistan

1.14.43.72.92.31.4New Zealand

548611.3367.3219.4108.763.2India

-1.941.839.931.613.04.0Republic of Korea

1.68.57.45.73.51.7Hong Kong

420.2879.4606.8314.8144.572.1China

96.589.446.822.45.31.9Bangladesh

Change 2010-2050 (m)20302010199019701950Urban Population (m)

104.8363.8318.6258.9192.8154.6101.3United States

7.226.323.219.014.410.96.3Australia

9.264.661.055.450.842.940.0United Kingdom

42.268.446.226.213.47.93.1Vietnam

18.340.431.722.116.07.83.4Thailand

0.45.15.24.63.02.11.0Singapore

56.1117.993.961.829.912.05.4Philippines

20.137.027.417.010.06.12.8Myanmar

14.734.829.020.29.03.61.2Malaysia

4.8

6.3

235.7

13.4

7.5

186.1

915.4

38.0

8.9

1027

143.3

2050

4.34.32.00.60.20.1Lao People’s Democratic Republic

9.97.73.51.21.10.4Cambodia

107.1192.7128.756.020.69.9Indonesia

4.44.73.13.02.41.3Sri Lanka

122.0119.764.134.614.86.5Pakistan

1.14.43.72.92.31.4New Zealand

548611.3367.3219.4108.763.2India

-1.941.839.931.613.04.0Republic of Korea

1.68.57.45.73.51.7Hong Kong

420.2879.4606.8314.8144.572.1China

96.589.446.822.45.31.9Bangladesh

Change 2010-2050 (m)20302010199019701950Urban Population (m)

Source: United Nations

10

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0 10,000 20,000 30,000 40,000 50,000

Real GDP per capita (US$)

Therm

al Coal u

sage (

tonne/c

apita)

IndiaBrazil

Russia

ChinaTaiwan

Sth Korea

JapanEU

US

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 10,000 20,000 30,000 40,000 50,000

Real GDP per capita (US$)

Natu

ral G

as u

sage (

kcm

/capita)

IndiaBrazil

Russia

Taiwan

Sth Korea

Japan

EU

US

China

0

10

20

30

40

50

60

70

0 10,000 20,000 30,000 40,000 50,000

Real GDP per capita (US$)

Oil u

sage (

bbls

/capita)

India

Brazil

RussiaChina

Taiwan

Sth Korea

Japan

EU

US

0

200

400

600

800

1,000

1,200

0 10,000 20,000 30,000 40,000 50,000

Real GDP per capita (US$)

Iron O

re u

sage (

kg/c

apita)

India

Brazil

Russia

Taiwan

Sth Korea

Japan

EU

US

China

Oil Natural gas

Thermal coal Iron ore

China consumption of key commodities

Source: Datastream

11

Australia: High commodity prices means record high terms of trade and surging income

Terms of trade since 1860

40

60

80

100

120

140

160

180

200

220

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Index,

2003 =

100

Korean war drives boom

in Australian wool

Stock market crash;

beginning of Great

DepressionUS ends restrictions on

private gold ownership

Bretton Woods system

established

Collapse of LTCM; BoE

sells almost half of the

UK's gold reserves

Start of WWI; drop in

Australian wheat production

Expected peak

in Sep-11

Period of resource price pessimism

- 'Prebisch-Singer' hypothesis

1973 oil shock

1979 oil crisis

Creation of the

Australian Wheat Board

UK returns to the

gold standard

UK leaves

'revised' gold

Bretton Woods system

collapses

Australian gold rush

(1850s - 1890s)

Long-run average in ToT

*

Australian begins exporting

coal to Japan

Source: RBA

12 Source: Gas Matters

0 10 20 30 40 50 60 70 80 90 100 110 120

Brazil

Iraq

Mauritania

Canada

Venezuela

Iran

Libya

United States

Equatorial Guinea

Norway

Peru

Angola

Abu Dhabi

Papua New Guinea

Yemen

Brunei

Russia

Oman

Egypt

Trinidad

Nigeria

Malaysia

Australia

Algeria

Indonesia

Qatar

Existing

Commited

Proposed

Million tonnes per year

Australia has huge potential in LNG supply

Existing and Proposed Global LNG Supply to 2020

13

A surge in mining, energy and infrastructure investment is getting underway in Australia – infrastructure is driving commodities

Sources: Access Economics and ANZ

0

20

40

60

80

100

120

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Q3 2010 Q4 2010

$bn

Major Project Investment:

Infrastructure, Mining and Energy

14 Source: ANZ, AME, Wood Mackenzie

Global Coal Export Supply

Australia well positioned with coal supply

Sth Africa

Poland

Colombia

Canada

Indonesia

Russia

Total World 2010

Thermal 716mt

Coking 248mt

US

Venezuela

Australia

Vietnam

China

Khazakhstan

La-Nina Impact

15 Source: ANZ, AME, Wood Mackenzie

India & China Coal/Port Map

India’s port infrastructure is catching up with China’s, but in coal receiving rather than iron ore

Coal deposits

\Capesize Ports]

High consuming regions

Coal deposits

Capesize Ports

s New Capesize Ports

UMPPs (4GW)

High consuming regions

16

Agricultural exports – the next wave for the terms of trade?

Meat consumption and GDP per capita

0

25

50

75

100

125

150

0 3 5 8 10 13 15 18 20 23 25 28 30

kg/person/yr

Real GDP (at PPP) per capita

Meat c

onsum

ptio

n p

er c

apita

1990 US$000

Singapore

0

25

50

75

100

125

150

0 3 5 8 10 13 15 18 20 23 25 28 30

kg/person/yr

Real GDP (at PPP) per capita

Meat c

onsum

ptio

n p

er c

apita

1990 US$000

Italy

0

25

50

75

100

125

150

0 3 5 8 10 13 15 18 20 23 25 28 30

kg/person/yr

Real GDP (at PPP) per capita

Meat c

onsum

ptio

n p

er c

apita

1990 US$000

Japan

0

25

50

75

100

125

150

0 3 5 8 10 13 15 18 20 23 25 28 30

kg/person/yr

Real GDP (at PPP) per capita

Meat c

onsum

ptio

n p

er c

apita

1990 US$000

South Korea

0

25

50

75

100

125

150

0 3 5 8 10 13 15 18 20 23 25 28 30

kg/person/yr

Real GDP (at PPP) per capita

Meat c

onsum

ptio

n p

er c

apita

1990 US$000

USA

0

25

50

75

100

125

150

0 3 5 8 10 13 15 18 20 23 25 28 30

kg/person/yr

Real GDP (at PPP) per capita

Meat c

onsum

ptio

n p

er c

apita

1990 US$000

India

0

25

50

75

100

125

150

0 3 5 8 10 13 15 18 20 23 25 28 30

kg/person/yr

Real GDP (at PPP) per capita

Meat c

onsum

ptio

n p

er c

apita

1990 US$000

China

Pork, chicken and beef consumption per capita

Source: ANZ, Bloomberg, Datastream

17 Source: ABS and ANZ

2010-11 GDP growth is likely to be weaker due to floods etc, but rebound stronger into 2012

Australian GDP growth

-1

0

1

2

3

4

5

6

00 01 02 03 04 05 06 07 08 09 10 11 12

GDP Q/Q change GDP Y/Y change

% c

hange

Forecasts

18

Structural change in the economy

Structural change is providing a net stimulus to Australia. Higher interest rates and tight fiscal policy are important. Inflation targeting the key anchor.

Flexible exchange rate helps. In past terms of trade rises the currency wasn’t flexible.

More flexible labour market allows the inflation target to be more easily met.

After the investment is over production should rise. Productivity is sacrificed in the short term, but it rebounds in the longer term.

Housing, consumer spending, manufacturing, tourism education services all weaken to allow the investment.

However, the business cycle is not dead. Australia is susceptible to a major Chinese slowdown.

19

China is now Australia’s No. 1 trade partner

Source: ANZ, ABS

Export destinations Goods ($bn) Services ($bn) Total ($bn) % share

1 China 42.5 5.5 47.9 19.2 2 Japan 38.2 2.1 40.4 16.2

3 India 14.3 3.7 18.2 7.3 4 Korea 15.6 1.8 17.5 7.0 5 US 9.6 5.6 15.2 6.1

6 UK 9.0 4.2 13.2 5.3 7 New Zealand 7.9 3.2 11.1 4.5 8 Singapore 5.4 2.9 8.3 3.3

9 Taiwan 6.5 0.6 7.1 2.8 10 Indonesia 4.1 1.2 5.3 2.1 All countries 196.5 53.0 249.5 100.0

Import sources Goods ($bn) Services ($bn) Total ($bn) % share

1 China 35.8 1.5 37.2 14.6

2 US 22.3 10.1 32.3 12.7 3 Japan 16.7 2.1 18.8 7.4

4 Singapore 11.2 3.5 14.7 5.7

5 Thailand 11.6 2.3 13.9 5.5 6 Germany 10.6 1.1 11.7 4.6 7 UK 6.2 4.9 11.1 4.4

8 New Zealand 6.6 2.9 9.4 3.7 9 Malaysia 7.5 0.9 8.5 3.4 10 Korea 6.6 0.3 6.9 2.7 All countries 200.6 53.8 254.4 100.0

20

Australian and Chinese Economic Growth

Source: ABS, Bloomberg

4

6

8

10

12

14

16

18

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

y/y

% c

h

-4

-2

0

2

4

6

8

10

y/y

% c

h

China Australia (rhs)

correlation coefficient

1992 - 2000 = -0.41

correlation coefficient 2001 -

2010 = 0.51

21

Summary

1. Under investment relative to population growth is driving the pickup in infrastructure investment in advanced economies.

2. Strong urbanisation is driving demand for Asian infrastructure investment. Putting upward pressure on commodity prices.

In Australia, 1. and 2. are coming together to drive the domestic cycle.

Australian economic growth has decoupled from growth in the US to some extent. This structural shift will continue.

Managing the impact of this transition is the key challenge for policymakers.

22

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