THE Brics (Brazil, Russia, India, China and South Africa) Summit in Durban this week generally sparks intense debate and interest in the body’s changing role on the international stage. There are many obvious links between the Brics nations that may form the foundation for these debates.
For example, China is the largest and India the third-largest economy in Asia (after Japan). South Africa is the largest economy in Africa, while Brazil holds the same title in South America. These economies also share the common thread that they are emerging markets with all the usual opportunities and challenges associated with economies in this stage of development.
Apart from the many socioeconomic and political links, the Brics nations also have very important links via commodity markets and through the production and consumption of raw materials.
Let us start with crude oil.
The world produced just more than 83.5-million barrels of crude oil a day (mbpd) last year. Of this crude oil supply, Russia produced just more than 10mbpd, China 4.2mbpd and Brazil 2.2mbpd.
India produced 850,000 barrels a day and South Africa produced about 200,000 barrels a day (including synthetic oil).
Together, the Brics countries were responsible for 21% of world crude oil production, or about 17.4mbpd.
Although the crude oil production in Brics countries is dominated by Russia, the total amount of crude oil produced as a group is not small.
For example, the Organisation for Economic Co-operation and Development nations produced 18.5mbpd, and Organisation of Petroleum Exporting Countries (Opec) nations 35.8mbpd.
In precious metals, the Brics countries dominate mine supply.
China is the world’s largest gold producer, at 380 metric tons last year. Russia is the fourth-largest producer, at 215 tons, followed by South Africa in fifth place with 200 tons. Brazil is in 12th place with 68 tons of production.
Together, these four nations are likely to produce 31% of world gold mine supply this year. On the platinum group metals front, it is even more pronounced, with South Africa and Russia dominating this space.
South Africa will be responsible for about 71% of platinum mine supply this year, with Russia producing another 14%.
For palladium, South Africa should account for 34% of mine supply, and Russia for another 43%.
Turning to base metals, the Brics nations are just as prolific (especially China).
This year, global primary production of aluminium, the most widely used base metal, will be about 50.03-million tons. Of this, Brics countries should produce just more than 31-million tons: China 23-million, Russia 4.02-million, India 1.8-million, South Africa 0.8-million tons and Brazil 1.4-million.
This is equivalent to 62% of the world’s total primary production of the metal. Turning to copper, the second-most widely used base metal, the picture looks very similar to aluminium’s. The Brics are expected to produce 7.86-million tons of refined copper this year out of a total of 21.05-million tons, or 37% of the world’s total refined-copper output. Of this, China is likely to produce the most, 6-million tons.
One can continue with metals such as zinc, lead, nickel and many other alloys and nonferrous metals, and the picture would look no different.
On the demand side of commodities, China has been the most important and largest consumer of commodities in the past decade, while the other Brics nations remain relatively small consumers.
For example, China will consume about 46% of aluminium this year, 42% of all refined copper and the country will also be the single largest consumer of bulk commodities such as iron ore and thermal coal, to name but a few. China is also likely to surpass India as the single largest demand centre for gold.
As a result, not only are the Brics nations closely tied to the global economic cycle as far as commodity demand is concerned, they are also highly dependent on Chinese growth specifically. This on its own is an important reason for Brics nations to ensure that their economies, as a unit, continue to grow.
Their supply and demand of raw materials (and, by extension, their economies) are so interlinked that the failure to grow would be detrimental to all.
The fact that the Brics nations are major suppliers of raw materials to the world should be viewed as positive. That said, it is doubtful that the Brics bloc can act as a cartel — like the Organisation of the Petroleum Exporting Countries — and become to some extent price setters for certain commodities — as many commodity markets remain fragmented within countries relative to crude oil.
There are many synergies that can be exploited on the supply side. These may range from the funding of projects to joint ventures and also training and sharing of technologies and knowledge.
On the demand side, however, the Brics nations are closely linked to the global economic cycle and increasingly depend on China’s demand for raw materials.
While the dependence on China for demand is not bad, it does create some demand concentration risk. But perhaps more importantly, it makes it more difficult for other Brics nations to reap the fruit of the beneficiation of local raw materials.
China is the largest consumer of raw materials for good reason. It has the largest population in the world. On top of that, the country’s urbanisation rate is still relatively low, at about 50%.
China also has the second-largest economy in the world and its economic growth rate is consistently more than 7%. As a result, it requires huge amounts of raw materials to feed not only its domestic infrastructure programmes, but also its manufacturing sector, which produces intermediate and final goods. These goods are manufactured for the local Chinese market as well as for the export market.
During the past decade, China has managed to become the manufacturing hub of the world. A country becomes a manufacturing hub of the world only in two ways — either by producing goods that only a few countries can produce (such as very hi-tech products), or by producing manufactured goods cheaper than anybody else. Arguably, China has managed to do the latter.
And herein lies the problem for other Brics nations: given that Brics countries in general are unable to produce the technologically advanced products that provide a country with a competitive edge — there are, of course, exceptions, but scale and volume are lacking — the only solution is to produce goods cheaper than everybody else, including China.
Local beneficiation using raw materials mined within a country may be in direct conflict with what China demands, as the largest consumer of raw materials.
And although China is a member of Brics, the country also has a manufacturing sector it has to maintain.
• De Wet is head of commodities research at Standard Bank.
• This article was amended to indicate that China is the world’s largest gold producer, at 380 metric tons last year. Russia is the fourth-largest producer, at 215 tons, followed by South Africa in fifth place with 200 tons. Brazil is in 12th place with 68 tons of production.