China's Real Estate Bubble Is Making Your Cell Phone Obsolete—And Valuable

In the latest installment of Butterfly Effect, we follow the impact of China's bulging real estate market on commodities such as copper, the latest tech innovations those commodities enable, the scrap they create, and the subsequent recycling opportunities—in China.

1. China's Ghost Cities

In November 2009, Al Jazeera English correspondent Melissa Chan discovered the nearly empty "ghost city" of Kangbashi on the steppes of Inner Mongolia, equipped with six-lane highways, an opera house, art museum, and a stadium. The city immediately became a symbol of China’s housing bubble, which has resulted in 64.5 million empty apartments across the country—enough to house a third of its urban population.

Stranger still is the effect that the bubble, burst or not, has already had on the prices of commodities around the world. And how those prices have lead to technological innovation. And how rapid innovation means more e-waste. And how that means more opportunities for recycling and a booming recycling business. Put another way, throwing out your cell phone is the financial equivalent of mailing a check to China.

While Kangbashi became the latest example of China’s overbuilding (on par with the empty New South China Mall—the world’s largest), the city is actually a complete success. Its sold-out apartments are second or third homes owned by the residents of Ordos, the city next door. Ordos is the capital of China’s coal and rare earth metals mining boom, with a GDP-per-capita estimated to be higher than Beijing.

A year ago, Bank of America-Merrill Lynch economist Ting Lu paid a visit to Kangbashi, noting in a subsequent report that owners in the neighboring city "are so cash-rich that they really don’t bother to rent their [empty] apartments." As Tsinghua University economist Patrick Chovanec explains, Kangbashi owners are treating their empty homes as "'a store of value,' like gold." A city that found riches deep underground is building another city skyward.

2. What Goes Up… Must Come Down?

Kangbashi’s speculators are hardly alone. One unforeseen consequence of China’s building boom has been the run-up in commodity prices. Decades of falling commodity prices have, since 2002, given way to steadily climbing ones. Exhibit A: China’s insatiable demand for coal (46.9 percent of world demand), steel (45.4 percent), zinc (41.3 percent), aluminum (40.6 percent), and copper (38.9 percent), despite the fact that the country comprises less than 10 percent of global GDP.

The typical explanation for this mismatch between demand and GDP is that China is heavily invested at the moment in building infrastructure. But Kangbashi raises the specter of using all of these commodities to build apartments that will never be occupied—and one day be torn down for scrap metal value alone.

Sufficiently alarmed by skyrocketing prices and disappearing farmland, the central government has tried to crack down on real estate speculation using capital controls, property taxes, and even by telling banks to stop making loans. But this last step has only spurred developers to become more creative in raising money—including dabbling in the commodity markets themselves.

3. Warehouses Full of Copper

In January 2010, British commodities trader Sean Corrigan of Diapason Commodities noticed that the prices of copper, aluminum, and zinc in Shanghai "bear more than a passing resemblance to the volume of new loans concurrently granted by Chinese banks." In an email to The Financial Times, he speculated that developers were importing copper to tap the easy money available for import financing.

It worked like this: They would buy copper on foreign exchanges, receive letters of credit from government banks or some other form of financing, and pledge the copper itself as collateral while they sunk the cheap money into real estate projects they could later flip at a profit. Until then, the copper, a valuable currency, kept piling up in China, while the developers' ability (and willingness) to pay back the loan depended on how their projects were doing, not how high copper prices climbed.

Corrigan's suspicions were borne out a year later when a research team from Standard Bank reported that as much as 700,000 metric tons of copper was just sitting in warehouses. "This is equivalent to around 11% of China’s total refined consumption and around 40% of China’s net refined copper demand," they wrote in a research note, adding, "More worryingly however is that the primary use of copper in bonded warehouse appears to be as a financing mechanism to provide cheap working capital for various types of business often unrelated to the metallic industry." As much as 80% of China’s warehoused copper was being used this way, mostly by developers.

So copper kept flowing into China, even when prices on the London exchange rose higher than prices on the Shanghai exchange—which should have sent it in the opposite direction. Wrote Peking University professor Michael Pettis in May: "This is great for copper traders, of course, but perhaps not so good for the overall economy since someone has to pay for those outsized trading profits." Not to mention the unintended consequence of linking the health of commodities markets to China’s frothy real estate schemes.

4. There's Gold In Those Phones

The damage has already been done when it comes to copper demand. Just as oil’s all-time high of $147-a-barrel in 2008 triggered a paroxysm of "demand destruction" and a search for substitutes including renewables and natural gas, the side effects of copper’s recent high prices could change the face of computing and make copper pipes in plumbing a luxury good.

"They’re trying to design copper out of applications where possible," says Lisa Morrison, a principal consultant at the metals and energy consulting firm CRU, which is easier said than done. Lightweight and highly conductive, copper is extremely difficult to swap out for say, aluminum, which is only half as conductive (and therefore requires twice as much metal to replace). One response is to simply use less of it, pushing electronics companies toward greater miniaturization in the name of cost-cutting. "The smaller everything gets, the greater copper’s conductivity gets," says Morrison.

Another response is replace metals altogether. CRU’s long-term outlook for copper calls for telecom to replace copper cabling with fiber optics, which dovetails nicely with web content companies’ desire to push ever greater amounts of data into homes.

If prices remain high (and China’s baseline demand should keep a floor under prices, barring the bubble bursting), Americans might finally realize they’re throwing away a fortune when they toss their old PCs and cell phones, which are loaded with bits of increasingly valuable metals. Rising prices have led to a booming business in "e-scrap," i.e. recycling the metals used in electronics, which requires only a tenth of the electricity require to smelt and refine metal concentrates pulled from the rough.

The EPA estimates Americans recycle at most 20% of their e-waste, with the rest going into landfill (where they comprise 70% of heavy metals). While European and Canadian smelters are busy doubling or even tripling their e-scrap capacity, the U.S. lacks even a single smelter. As a result, America is a major scrap exporter. To China.

[Image: Wikimedia Commons]

Read more from Fast Company's series The Butterfly Effect: The Race For The Most Efficient Server Is Turning Tech Companies Into Power Companies 

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3 Comments

  • Greg Johnson

    Another interesting article from Fast Company. I wonder if anyone of influence is paying attention?

  • Scott Byorum

    In some nations, landfill scavenging is a living.  I read articles like this and I feel sad.

  • Chris Reich

    There is a lot to digest in this excellent article.

    I am involved in the solar PV industry. We're seeing more projects go from copper wiring to aluminum because of the high cost of copper. This in turn creates other issues because aluminum wire, when substituted for copper, requires a larger wire size. The larger wire size requires larger fittings inside the components of connection such as combiner boxes and inverters. And, the larger wire size requires larger bending radii so often enclosures have to be larger.

    So not only are small components affected, but big stuff is being affected as well.

    The copper problem is only the first bump of iceberg proportions that the Titanic U.S. is noticing. The hull of the economy has been ripped open and we are still still dancing and drinking unaware of the disaster ahead. Those who are cabin bound have heard the sound. As with the actual Titanic, the ones with nothing to do felt the impact while the party went on three levels above.

    But the U.S. economy has more icebergs ahead. Oil, gold and cash shortages are going to beat the hull out of the U.S. economy. Big problems. These big problems come at a time when we need smart people. But our economic decline is shadowing the decline of education.

    I doubt we'll see the nobility of the band playing on and many willingly go to the bottom for the sake of others. When we wake up to the disaster we face and realize that we are on our way to steerage, the masses are not going to be happy.

    Consider the society that would put a $76 billion valuation Facebook while falling to 17th place in the production of alternative energy components. There is something very disturbing to me about that.

    Chris Reich
    www.TeachU.com

    (Sorry to ramble; I'm fighting a cold)