These are questions of both practical and theoretical interest.

Linking resource demand and economic development

 

Our analysis extends previous work that attempted to codify a robust relationship between metal demand and economic development. Our predecessors in the field focused on the ‘intensity of use’ curve, an upside down U shape in metal use per unit of output and income per capita space. We choose to shift the focus to per capita scaling, placing metal use per head beside other aggregate development indicators. In fact, we have recast the issue in the terms used by Kuznets: we are interested in the Kuznets Curve for Steel (the KCS).

To measure metal demand, we take the variable of total crude steel consumption. To measure economic development, we use the variables of GDP, investment (defined as gross fixed capital formation), electricity use, private automobile ownership, openness to trade (defined as exports plus imports over GDP, scaled by GDP), and urbanisation rates (the percentage of urban residents in the total population).

Moving beyond a simple framework of extrapolation utilising only cross sections or short time series of GDP per capita, we use a variety of development variables, to analyse steel production and consumption in 14 countries and regions between 1890 and 2008. This analysis establishes a clear relationship between metal demand and economic development that is shaped like an upside down U through time: this is the KCS.

Patterns of demand

 

The historical record shows a clear similarity in terms of the pattern of rising steel output per capita for the United States from the mid 1930s to the end of the Korean War, and for Canada, Europe and the CIS from the 1950s to the 1970s.

The experience of Japan from the early 1950s to the 1970s and Korea from the early 1970s to the present day, and China since 2000, are also quite similar to each other, but exhibit a much greater amplitude than the Western experience. Japan and Korea’s levels of per capita steel production have reached a point much higher than that reached by other industrialised countries. In fact, these levels are unprecedented in the Western history of industrialisation. In the case of Japan, the phase of acceleration lasted for about 20 years (1950 to 1970), while the path has been more protracted for Korea at almost 40 years and still counting.

What does this mean for China’s future trajectory?

China has defined its own trajectory to form a unique economic history. Its future will also be distinctive.

In China during the past three decades, investment, resource demand and openness to trade have all expanded at rapid rates. Urbanisation has also been increasing, but at a slower rate.  These factors will contribute to the future course of income per capita and, combined with technological progress and changing consumption preferences, will determine steel consumption per capita and demand for other resources.

Unlike the countries in our historical sample, China will have to face the challenges of global imbalances, climate change and the ageing society. Indeed, no currently wealthy country had to deal with such an unpropitious global environmental backdrop. The imperative for China to pursue resource saving technological change in the future is greater than that of any of the individual economies in our sample.

 

A cautious projection.

 

Chinese GDP per capita grew at a compound rate of 7 per cent between 1980 and 2008. Extrapolating current growth rates in urbanisation plus investment  and trade propensity, our framework produces the result that peak demand for steel will be reached when China’s GDP per capita level is US$15,449.  If China continues on its post-1980 trajectory of 7 per cent compound growth, China would reach this point during 2024.

In 2008, China’s level of per capita income was US$5,449. Hence, per capita income must almost triple before peak steel intensity is attained. Even if the somewhat faster post-1990 pace of 7.8 per cent is used (a rate consistent with GDP per capita more than doubling each decade) then the peak is reached three years earlier.

Based on this projection, in per capita terms, China’s demand for steel will be higher than the peak level reached in the West, but lower than the peaks seen in Japan, Korea and Taiwan. China is unlikely to continue to closely follow the Korean path once it moves deeper into middle-income status, because it will be compelled to alter its mode of economic growth. China’s final path is likely to emulate certain aspects of the experience of North America (building a continental economy), Japan (a large trading economy) and emerging Asia, rather than faithfully following the historical course forged by any single country.

In sum, China’s impact on the global resources demand/supply balance will be profound. The world should plan for a time when upwards of 700kgs of steel are produced per Chinese citizen. Such is China’s scale, and even assuming environmentally positive structural change, its development promises to generate a second global Kuznets Curve for Steel that is still more than a decade from its turning point.

Huw McKay  is Senior International Economist at Westpac Banking Corporation. Yu Sheng is Principal Economist, Productivity Section, in the Productivity, Water and Fisheries Branch of the Australian Bureau of Agricultural and Resource Economics (ABARE). Ligang Song is Associate Professor and Director of the China Economy Program at the Crawford School of Economics and Government, Australian National University.

 

This essay derives from the authors’ contribution to China Update 2010.