-- Posted 2 March, 2006 | | Source: SilverSeek.com
We just returned from a nine day trip to China. Having spent a few days in Shanghai, a day in Guangzhou and the rest of time in places less traveled, including two silver projects, we had some ideas that we’d like to share. Normally we stick to silver in our writing, but this time we felt compelled to stray if just a little bit. Then again, as you will read below, silver is such a unique metal, such an integral part of our lives that in any type of development in modern society will have a “silver angle”.
Hardly anyone will dispute that China is a development story. Even though it was before our time, we get a sense that present day China is somewhat like what the US was a hundred years ago – zooming. That is old news you’ll say and be absolutely right. However, we’d like to point to some observations that dampen our enthusiasm about China’s prospects. We are not here to bash China, downplay its achievements or question its strategy. On the other hand, everyone we’d spoken to in the last several years, who had been to China, helped to set our expectations so high that we felt the reality didn’t quite live up to them. Whether it was our expectations that were the problem or in fact the Chinese miracle has been overstated (we’re good at that), you decide.
Yes, Shanghai is a metropolis. The number of high rise buildings in Shanghai is probably several times that of New York’s. From the top of the (TV/tourist) tower in downtown Shanghai you get a magnificent view of the city – skyscrapers in any direction as far as eye can see. We got pictures to prove it. The sheer size of it is absolutely staggering.
Then we learn how they are built. Now, we are not claiming that this is a complete story, yet we got it from people who have no reason to tilt the truth in either direction. Apparently, a great many of those high rise buildings are empty and were built just to be built. The story goes that government (banks) provides loans to construction companies to build them. Contractors get the money up-front and have an incentive to “save” as much money as possible on construction costs. That leads to use of cheaper “sub-standard” materials. Builders have no interest in the future of these buildings and could care less how they will be used, if at all. Vacancy rates in these buildings are said to be high which earned them a local nickname of “see-through” buildings.
By the way, use of “sub-standard” materials is not limited to Chinese builders. A fellow traveler from Arizona shared this story. From his words there is a cement plant in Arizona that produces high quality product which in its entirety is shipped to – where else? – China. At the same time, for domestic construction in the same area, where that plant is located, cement is imported from Mexico. Again, we are not claiming that it’s accurate, just passing on the tale.
Back to China. Those who have been to Shanghai know that Kuangpu River, which cuts through the city, is a busy transport way. Very busy indeed. Ships and boats of all shapes and sizes are rushing back and forth seemingly non-stop. We saw it first hand because we asked for a river-view room at the Shangri La Hotel. We also ferried across the river a couple of times to visit the Bund and the Nanjing Road attractions and got a pretty good look at it.
All the while we had a strong feeling that no fish is present in the river and in the off chance there is some, doomed would be the creature to eat it. Countless shops and restaurants on the old-town side of the river emit such a heavy stench, that it even beats the unbridled exhaust smoke coming from the river boats on one side and scores of autos crowding the freeway on the other. We would be willing to bet a couple of grand that those shops and eateries dump all they can into the river, as their counterparts on the inner streets of Shanghai and universally in other places we have visited dump right on the side-walk.
This story comes from a friend who lives in China for four years now. He knows a factory that has a manufacturing unit. Apparently this unit is subject to environmental regulations and recycling/clean up process before it can discard its waste. Such a facility has been built and is present on site, but it’s only turned on when there is some sort of a check or audit comes around. The rest of time the recycling unit just sits there rusting.
Population is another problem, of course. If strength is in numbers, in our view, so is weakness. One and half billion Chinese throw off mountains of garbage that is not disposed of duly. Yet the real problem with the population is the ratio of men to women. While government’s one-child policy did help slow down the population growth it also lead to a distorted ratio between young Chinese men and women. Apparently, since they were allowed to have only one child many Chinese families used every trick in the book to have a baby boy rather than a girl. That is because traditionally a son would stay with his parents and take care of them when they get old while a daughter would marry and go on to live in her husband’s family. Well, the damage is done and the trend is still in motion. We don’t know how this issue will manifest itself, but we’re fairly certain it will surface within several years.
There are many more small things that we can’t even recount. For instance, this is a true story told us by an Australian investor whom we met in Shanghai. An Australian entrepreneur built a shoe manufacturing line in one of southern China cities. He hired local management to run the place. Within a few months he found out that his Chinese management built an exact replica of the shoe factory at the other end of the town: same equipment, same material, same process. Only labels were different. We believe the story because of the source it came from. But also because we saw many such knock-off brands in a big department store where we went to pick up some necessities after our luggage was lost by Air China in transit and we had to get by for four days until we got it.
When all is said and done, China is a story that is happening and this opinion or any other will not change a thing. Yet, with all its great achievements and progress, China should, does and will have its share of problems. To be clear, we are not bearish on China. But as investors we have to be realistic and as such we don’t share the super-bullish sentiment on China broadcasted from every venue. The way we see it, best places to invest in China, aside from natural resources and energy are healthcare and waste management.
Lastly, silver. Many of Shanghai’s high rises use their outer surface as advertising boards. They use multi-color lights to string together any brand name, logo or product you can imagine. To that end neon and increasingly other, more advanced forms of electronic ads are everywhere, especially in larger cities. While we have not done much research on the subject yet, we are willing to go out on a limb and speculate that all that booming construction requires a great deal of silver. Every so often you hear the pundits say that all-time highs in base metal prices will lead to their increased production and since the majority of silver is mined as by product of base metals (and gold) they go on to forecast an impending glut in silver supply. Well, let me just ask you this. If the world can’t get enough of copper, lead, zinc, moly, nickel, etc., what are these metals being used for? Are we casting giant 80 feet statues (the likes of which we saw carved of stone in Henan) from these metals or are we (the people) using them in construction and industry? And if so, how would it be possible for the Chinese to build 17 cities the size of Chicago every year without using a commensurate amount of silver or more? And that’s just China, what about the rest of the developing world? Did we suddenly switch to a “silver-less” society, cause if so, I must have missed the memo and until I see it I ought to assume that developing world is using silver in ever-greater quantities. They need it, and it is still very affordable.
February 28, 2005
Sean Rakhimov
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Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the author and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. The author, entities in which he has an interest, family and associates may from time to time have positions in the securities or commodities discussed. No part of this publication can be reproduced without the written consent of the author. © Copyright 2005 by Sean Rakhimov.
-- Posted 2 March, 2006 | |
