Clinton Dines is widely respected as one of the most knowledgeable people on the question of China’s raw materials future. Here is an article that my friend Professor Ici sent me. it’s from an investment service, and is Australia-focused, but gives a good review of how Dines sees things. Here is the article - with thanks to the good Professor.

 

Recently I was privileged to interview Clinton Dines BHP’s senior China representative for 21 years. It was the most exciting investment interview of my lifetime. Dines provides valuable insights into Iron Ore, Copper and Oil prices over the next decade. I have made part one of this essential reading 2-part Special Report available to you below.

Opportunities from China - Part 1
Spending several hours interviewing and listening to immediate former head of BHP China, Clinton Dines, is an exhilarating experience. Is there a looming housing crash in China - “FROGSHIT”, says Dines. What of the One Child Policy - “What One Child Policy?” With over 30 years experience based in China, mainly Beijing and Shanghai, Dines has an awesome knowledge, but what most impresses is on-the-ground anecdotal knowledge which makes much academic statistical musings sheer nonsense.

Look at the elephant, he insists, not the ticks and flies on its flanks. With a logic honed at top French business academy INSEAD - current CEO BHP Billiton (BHP), Marius Kloppers, is also a graduate - he refers to the prisms through which various nations view China, and get the wrong sighting. Dines is a Queenslander and a 1978 graduate of Asian studies from Brisbane’s Griffith University. He went immediately to China on a post graduate program and remained there mostly on the mainland, going on to serve as BHP’s senior executive China for 21 years, retiring as President BHP Billiton China August 2010.

Again look at the elephant, he insists when discussing how many westerners get China wrong as they look through a prism where they feel challenged by their perception of the emergence of another superpower. I had brought a prominent American economist’s very current view (that day!) that a Chinese housing bubble was about to bust. And in Australia we are still influenced by of our history of viewing the north as the yellow peril, but China is a major economic boon for us. He expresses strong disappointment at our politicians’ lack of appreciation of China, says our banks do not understand it, only a few academics do. But he singles a few out on the “they understand” side like Grattan Institute’s Saul Eslake, and Reserve Bank Governor, Glenn Stevens.

His bottom line for Australia is that Chinese development is very positive for our economy as long as we do not fall foul of the so called Dutch Disease where the text book version says other industries were damaged by the impact of diversion of resources to the North Sea oil industry, and the subsequent high currency. The Dines version is that our “fat and happy and complacent culture could become lazy and unprepared for when the worm turns.” He is a strong advocate of an Australian Sovereign Wealth fund. He is a Visiting Fellow of the Lowy Institute whose role is to develop new ideas and dialogue on international development and Australia’s role in the world.

He recalls selling of iron ore in the late 1990s at just US$17 a tonne, and discounting from that level, reflecting the state of the commodity markets in that era.

I met him at an investor presentation held by Caledonia Investments, the Australian global fund manager currently launching an Asia Fund. Clinton is executive chairman and, with CIO Tim Davies, aims to invest in Hong Kong-listed Chinese and Asia Pacific companies which are highly-leveraged to the China growth story. Minimum subscription is $250,000. Caledonia was founded in 1992 by Mark Nelson, Principal and joint chief investment officer, and the Darling family led by Michael Darling, a keen student of China for many years. If Caledonia can match Clinton’s extraordinary China knowledge with similar investment expertise, the fund will be a major winner. I have had funds invested in the Caledonia Global Investment Trust for some years so admit to a positive bias and was at the presentation as a client guest.

Dines remains a BHP Billiton shareholder and speaks very warmly indeed of the company and its prospects in the years ahead. He hugely appreciates “being a very interested and privileged spectator of one of the great transformations in human history and one of the most significant eras of China’s long and spectacular history. And I happened to land there just as this era began, an era in which China started along the path to resume what the Chinese think of as their rightful place in the world.” (Speech to Lowy Institute, February 2010).

When he began in China early 1979, aged 20, the economy was the same size as Australia’s, but today is half the size of the US. “The transformation began after 200 years of social upheaval,” he points out.

In the Lowy speech he adds: “The changing China that I have been privileged to observe over the last 30 years is characterised by several features - scale, complexity, diversity, dynamism, opacity. The virtues of the Chinese people - willingness to work hard, a reverence for literacy, a propensity to save - have been well harnessed to the cause of national development in the past 30 years by the insights of Deng Xiaoping and nurtured through an unusually extended period of stability by a government that has muddled through with considerable agility and, by Chinese standards, benevolence. The change in China has been good for the Chinese people and it has generally been good for the world and for Australia. What we perhaps didn’t anticipate is the extent to which the arrival of a wealthy and powerful China would be disruptive. But China is with us, China is not going away anytime soon, China will continue to change, China will inevitably become more influential and assertive of her national interests - the onus is on us to be good at reading the signs and agile enough to make the appropriate adjustments so that our national interests are also asserted and protected.”

In his Caledonia presentation and in a following one hour interview with myself and our resource analyst Mark Taylor, Clinton aimed full bore at The Elephant, emphasising:

Over the last 30 years some 200 million Chinese - or “three Germanies” - have become ‘comparatively affluent’, earning money over and above basic needs. As now as living standards increase, they can take out a mortgage, and buy a car. Where once a house was 8 square metres that size has grown past 10, towards 25 square metres, and the “process keeps on going.” He expects another 200 million to achieve the same affluence over the next decade. They now can eat better, wear nicer clothing, obtain better health care, better education for the kids, then luxury items and leisure - jewellery, hotels, the second TV and tourism abroad. All the things Australians want!

Australian tourism - huge opportunity
Last year, he noted, 454,000 Chinese visited Australia with plenty of money to spend. I mentioned the Japanese tourism years ago when control largely went to Japanese hands. He was scathing of Australia’s commercial agility at the time, and obviously felt there was a big future for our tourism industry in developing the Chinese market. How is Oprah Winfrey spelled in Chinese, I wondered.

China is not indebted. Its massive pool of household savings exceeds the combined GDPs of the other BRICs - Russia, India and Brazil - not counting corporate savings. China has some US$2.8 trillion in foreign reserves, only half placed in US dollars. Where the country uses debt it is not “stupid enough” to use short term debt, most debt is medium to long term denominated. Chinese are fiscally prudent and wary of debt by nature. The budget deficit currently runs at 2%.

One Child Policy. I listened to this with great interest, having read (very doubtfully) screeds of doomsday stuff on China growth based a on supposed One Child Policy and perusal of official statistics indicating an aging population. Clinton says the One Child Policy population may have affected the cities to some degree but in rural areas as the inspectors visited, the children were sent to the next village. When an additional child was born, overnight a childless family down the road got lucky. The Government understood and simply ignored the process. He also has a view of these issues through his wife’s eyes, where she works for a foundation (Half the Sky) which operates in over 40 orphanages providing staff and training. In an indication of changing times, he noted that China’s rising incomes means that fewer healthy children are now being abandoned and a high proportion of those coming into the orphanage system these days are children with disabilities or special needs.

Dependence on exports. The initial tigers - Japan, Korea, Taiwan, Hong Kong, Singapore and Malaysia - were export oriented insular economies. But China is a continent and it takes off on the same developmental journey as the US with a population at least 10 times larger when it began the same journey late in the 19th century. And China as a continent has the same immense need for transcontinental infrastructure. The early tigers were export oriented, but he emphasises over the last decade net exports contributed on average only 1.5% to GDP growth per annum. His presentation notes summarise: “Growth is driven by human aspiration, modernisation, industrialisation, urbanisation and rising levels of per capita consumption. Domestic investment and domestic consumption dominate economic activity. With investment capacity supported by a high savings rate, low debt levels and increasing capital efficiency, the economy has irresistible momentum and is demonstrably resilient to internal challenges and external shocks - for instance the rapid recovery from the GFC.”

Urbanisation and the accompanying boom in residential, commercial and infrastructure construction are only partially completed. “Shanghai is only half developed when you look at the old buildings, empty spaces, yet to be filled or redeveloped,” he says. A materials and energy intensive phase of growth is likely to continue for another two decades, accompanied by rapid consumption growth.

Chinese housing bust: “Unadulterated Frogshit!” - Dines expressed very strong disagreement with the views expressed last year by “Mr. Short Seller” Jim Chanos. Apart from that immense rising tide of affluence, some key points were:

(a) Chinese housing prices had been growing for many years at 9% per annum, but income growth has been 10% per annum.

(b) Chinese home buyers typically put down a 35-40% deposit and to the chagrin of the banks, pay it back quickly in 5-7 years. Credit card penetration is very low, many have debit cards!!!

He accepted some parts of some cities were overbuilt, but clearly regarded these instances as simply flies on the elephant - “look at the elephant, not the ticks and flies…”

In the energy sphere they were diversifying away from the coal - which supplies some 70% of their energy. “It’s not like Queensland coal, 90% of China’s is 600 metres deep and getting deeper - and the Chinese have rising costs too! They are moving away from it on a greater scale than anyone else. “They are developing wind, solar; they are at the leading edge of developing battery technology, biomass, tidal, and algae. Algae? - they have the capacity to throw 50 Ph.D.s at their research on any given problem and they are serious about it because they have got to be.” By 2020 the aim is to reduce dependence on coal from 70% to 60-50%. Of that 10% shift, the lions share, perhaps 8%, would come from gas and nuclear.

 

We discussed the outlook for some key commodities.

Iron Ore
Until earlier this year Dines was slightly more bearish than consensus, feeling the iron ore price could begin to weaken from 2013, as against consensus 2014/15. But now he cites (1) delay in projects following the GFC (2) rapidly rising costs for BHP and Rio Tinto (RIO) to build new capacity now at $180 per annual ton. He does not see the iron ore price rolling over until late decade perhaps 2018/19 at earliest mid decade. “It’s difficult to tell, to be precise, there are so many variables.” He believes iron ore will be the first major mineral to see a price fall as it is plentiful around the world, thus likely first to see supply come into balance with demand. He emphasises the maxim that high prices are the elixir to achieve low prices, as they bring on additional supply. It is notable that he does not mention any cessation in Chinese demand. BHP and Rio are the lowest cost Australian producers, respectively the Rolls Royce and Bentley of the resources market. Demand for iron ore is not going to slacken, even at current prices as steel represents only a small component of construction costs, with land costs and developers’ margins being significantly larger variables.

 

Copper
Dines describes this as the “modern metal” coming into its own after Thomas Edison brought electricity to the world in the 1880s. Again he looked at demand, the transmission of electricity, that a McMansion required 200-250lbs copper, and concluded again that copper was a small and difficult to replace component of total costs. He believes to meet supply the world needs to bring on the equivalent of one new Escondida each year, for many years to come. He does not see copper’s price falling from current US$4 plus levels for any length of time for many years after iron first dips.

 

Oil
Since the 70s we have become far more efficient in the use of oil, through smaller more fuel efficient cars and so on. So we could live with relatively high oil prices. I brought up the issue of Hubberts’ Peak where early this decade ex Shell man Kenneth Deffeyes projected that the supply of traditionally produced oil was and is about to fall. Dines discussed this issue but then brought up the issue popularised by well regarded US oil industry veteran investment banker, the late Matthew Simmons, in his 2005 Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Dines agreed very strongly with the direction of Simmons’ arguments that the Saudis simply did not have the oil reserves they claimed and that rather, they faced the threat of diminishing production as their major oil fields faced rapid decline. He pointed to a minimum oil price close to US$100 in today’s dollars, to justify alternative supply including from deep offshore fields and areas such as Canada’s Athabascan tar sands.

So in summary, we found a medium term bull on iron ore and a long term bull on copper and oil. We could have spent many hours talking with Clinton, but had just one hour and that through wonderful courtesy from my friends at Caledonia. I had already listened to Dines for over an hour at that presentation, and learned a great deal from a very animated Q and A that night!

We gained an immense and believable appreciation for a Chinese future from a highly intelligent and straight talking man deeply embedded in the mainland for over 30 years! Thank you Clinton Dines!

Ian Huntley