Published in September, 2013
For almost two decades now the single biggest determining factor in the evolution of the stone industry in the world in terms of mining and processing, has been the demand for natural stone in China. Any mining company making an investment in a stone quarry, no matter in which country it may be located, has had to consider- is there a demand for this stone in China? An affirmative answer to this question, followed by investment in opening the quarry, was almost a guarantee of big business success. Few businesses in real life have been so profitable, and many people, starting sometimes with only a moderate income, have become wealthy simply by exporting blocks to China. Many times they did not even have to make much effort to sell to China. The Chinese block inspectors were soon all over the quarry, placing orders for the whole year, and frequently offering to pay huge amounts upfront to pay for cost of investment needed. Even when advance payment was not being made, revolving letters of credit were easily opened. In other words, the risk for the quarry owner was fairly low, and the payback huge.
For many processing factories all over the world, however, China has been often been a nightmare of a competition. Even in markets where, due to logistical reasons (east coast of US, for example), the Chinese competition was somewhat blunted, in just about every segment of the industry, granite or limestone, monuments or tiles or projects, the factory owners always had to take into consideration which opportunity was still available in the market to them where they could sell without always being undercut by much lower prices and, often, faster delivery from China. Moreover, it did not matter where the stone came from, a quarry a few kilometres away from the factory, or five thousand miles away, even the high transport costs seemed irrelevant- if you competed with Chinese companies on price, you were always the loser.
But in 2013 we have now reached a new stage in China´s astonishing development story- and a new model of growth is fast evolving within the country. Many assumptions that were considered obvious and never even questioned by the stone industry, are no longer valid when considering the Chinese market, or analyzing the Chinese competition in the future. Without claiming to analyze all of them, we enumerate three of the major assumptions that are no longer as valid for China, or are undergoing major changes in a way that they have the potential to considerably change the competitive landscape in the natural stone industry.
1) An undervalued Chinese currency.
This has been among the most persistent assumption everywhere, not just in the stone industry, but in practically every single economic segment where China is present in the international markets as an exporter. But in 2013 the Chinese currency is no longer considered undervalued by the financial world. From a ratio of 8.5 Yuan= 1 US $, a few years ago, the current exchange rate is around 6.1 Yuan = 1 US$, a strengthening of around 30 %. In recent months the dramatic weakening of emerging market currencies such as the Indian rupee, Brazilian real and the Turkish lira, among others, has highlightened even more this new reality. It is an extremely complex task trying to compare the Chinese rembimbi with other emerging market currencies, but the overall conclusion is clear. An undervalued Chinese rembimbi can no longer be considered a valid explanation when Chinese prices are lower than others.
2) Very low labour costs.
The Chinese economic miracle was based on, among several other factors, very low labour costs. In the stone industry it has always been assumed that with these labour costs (around US$100 per month a few years ago) no one could ever hope to compete with China in semi-processed and processed stone. If your products in natural stone were going to compete with those made by cheap Chinese labour, most of the time the foreign factory owners ended up concluding there was no point in even trying to compete. In some segments, very superior quality became an important differentiator for some foreign companies, or some exclusive stone not available to the Chinese, but the battle for volume was generally considered lost. Now guess what? In 2013 most multinationals do not consider China to be a low labour cost country anymore. Annual salaries have been increasing by 25 to 30% in recent years, and many stone factories in places like Xiamen are finding it difficult to even find workers willing to work in the stone industry. The Chinese stone industry has started making the massive changes needed to reflect the new reality and automate their processes.
3) Unlimited growing demand, year after year, due to extraordinary growth of the economy.
China has been growing by around 10 - 12% year after year, for the last three decades. This fast economic growth was accompanied by a massive urbanization process that led to hundreds of millions of people moving from the rural areas to the cities, leading to a massive construction activity. A great part of the demand for natural stone in China has always been for the local market (around 70 to 80 %), even though competitors in other countries got the impression the stone industry was mostly export oriented because of the ferocious competition. A great part of the economic growth was concentrated in the coastal part of the country. The financial crisis of 2008 forced the Chinese government to launch a massive fiscal stimulus (around US$ 650 billion) to revive economic growth, and a lot of this money ended up in real estate. Let is leave aside the details of this new massive building activity, of why and how, the reality today is there are currently millions of unsold houses in many cities, and the prices of houses have increased dramatically, at often unaffordable for the average person. Is there a gigantic bubble? Many respected economists say this is so, and warn of the risks of a big crash if this bubble pops. But it is also true that many other respected economists disagree that a dangerous collapse is around the corner. What is true, however, is that economic growth has slowed down to a more sustainable rate of about 7%, and also that the Chinese government is extremely conscious of the risks of excess construction and the speculative element behind the building activity. It has been trying very hard for the last 2 years to moderate this building boom and to control the speculation that has made property so expensive.
But what is perhaps even more important for the natural stone industry of the world, is to know that the Chinese government considers as its priority for the next decade or so, a policy of urbanization whereby more than 100 million people will move from the rural areas to the cities. This new urbanization process will focus more on interior China, where 800 to 900 million people are living.
There are also, of course, other factors which help to explain why the Chinese companies occupied such a prominent position in the natural stone industry and in the international markets. Land at cheap price for setting up factories, cheap credit, cheap energy, subsidies of all kinds, but also superior logistics and a new magnificent infrastructure in the form of ports, etc. - they all helped to make China the most important processing centre for stone in the world.
But the new fast changing China is different- land is no longer cheap, credit is hard to come by for the great majority of companies, energy is much more expensive, and so are all other inputs. Also, extremely important, there is much greater sensibility in China towards the environment. Quarries can no longer be opened in the country so easily, and, in fact, many of them have been closed. The case of G63 granite quarries is well known to all. Safety standards too are becoming higher than before. All these trends add to costs.
So, with the new China, which is reinventing itself to become less export oriented and more local consumption oriented, also more conscious of environmental factors making the opening of new quarries subject to controls and higher standards, how will the stone industry of the world be affected?
Even though there is so much uncertainty in the world economy nowadays, and within China itself the economic growth is slowing sharply, one thing is clear- if the urbanization process does take place at the pace the Chinese government is planning, we can be guaranteed there will indeed be a huge demand for natural stone in that country for a long time to come. Not only millions of new, cheap, affordable homes will be built (where, presumably, less natural stone will be used), but also thousands of schools and hospitals, shopping centres, public buildings, etc. will also come up. And, of course, hundreds of thousands of luxury homes will also be built as a result of the new wealth created among the people. Natural stone is bound to be in demand in millions of square metres every year in China- probably less in the more developed coastal China, but much more in interior China, and in the new cities that are being built.
The great unknown as of now, the billion dollar question for the stone industry of the world, is- where will most of the natural stone that will be installed in China, be processed? Will the pattern of recent years continue- Chinese companies buying the blocks from all over the world, and doing most of the processing in the factories in places like Xiamen, Yunfu, Shanghai, etc.? For reasons explained above, this may not be the industry structure in the future. The major Chinese companies are already making major investments in new machinery, etc. to automate their processes and to meet future demand. But not all the thousands of companies depending on cheap labour will have the capacity to invest in modern machinery, and many, if not most, of these companies are likely to close down. In fact, industry watchers have noted, already there is a major shake-up taking place within the Chinese stone industry in all aspects-higher prices, more focus on product quality and design, greater automation, closing of small units, etc. The key question- will the stone factories in Europe, India, Turkey, Egypt, Brazil, etc. also be selling locally quarried semi-processed and processed stone to China in the next decade, however, currently remains a speculation. The answer to this question- will China the Competitor now become China the Market for these processing factories of the world ?- this will be the major driving force for the industry trade flows and affect its growth and profitability.
Also, to a very large extent, the sheer dominance of China in the last decade led to stone companies from all over the world practically renouncing the rest of East Asia as a market and surrender it to the Chinese factories located on the coastal areas, in places like Xiamen. This rest of Asia is no minor market either- we are talking of another 600 million people in an economically dynamic region. Will the factories of the rest of the world now once again start sell semi and processed stone to this dynamic and increasingly wealthy region? In recent months there has already been a slow trickle of buyers from South East Asian countries now looking to source some of their stone supplies from factories located in the country of origin of the quarries.
There is one additional element people will need to consider when analyzing the competitiveness of China in the East Asia markets- the superior logistical advantage of places like Xiamen. A container of stone reaches the East Asian markets in rapid fast time of 48 hours to less than a week from the port of Xiamen. From the rest of the world it still takes several weeks to more than a month. This is a huge consideration for importers everywhere, and will continue to be so in the future. Therefore a prominent place for Xiamen in the future in the stone industry is likely to be assured. But whether Xiamen will be just an important LOGISTICAL centre (almost certain), or whether it will also continue to be, in ADDITION, a huge PROCESSING centre of stone, there are some doubts about that.
In only the last 12 months some changes the world stone industry are already being noted by all. For example, Chinese buyers of blocks have become much more quality conscious and are being far more selective, just like other blocks buyers from other countries. They are no longer buying blocks like before; they are no longer cleaning up the quarries. For the foreign quarry owners this is an extremely important development. If Chinese buyers are no longer taking away inferior quality blocks which no one else wants either, a great part of the attraction of selling to China will have gone. Why give a special price and preference to Chinese buyers if they are purchasing like everyone else? And, how to find a solution to the blocks accumulating in the quarries for which it is more difficult to find a buyer? The whole economic rationale when operating quarries will have to be rethought by quarry owners in India, Turkey, Egypt, Italy, Spain, the Nordic countries, etc.
Moreover, it is not by any means certain that all Chinese companies will continue to be cash rich. With major changes in the local market taking place, slowing down of regional property construction booms hurting some stone suppliers, shifting of demand to new areas of the vast country, one can be sure that quite a few stone importers and factories will be in serious financial trouble- and consequently become a source of trouble for their suppliers. A shift to generally slower economic growth and changes in the economic structure of the vast Chinese economy can also mean volatility in demand-there will be ups and downs, and periods of great uncertainty. All this is normal, but the foreign block suppliers to China are not used to all this- they have only seen more and more demand.
Whatever be the future, we shall soon know how our industry is affected, and how it reacts. New mega trends which often took years before they become evident, whenever they involve China, become the new realities within just one or two years. Bar some unexpected changes in exchange rate trends, in Chinese government policies, in the recovery of the world economy, many of these new trends in the stone industry of the future will be affecting most stone industry businessmen very soon, and force them to rethink their business in a dramatically different way.
For some the momentous changes taking place in China will be a crisis. For others it will be a huge opportunity.
Now where will you be?