GOLD NEWS
China's 'new normal' still global metals demand driver
Although China’s growth has slipped the Asian dragon remains the key driver for metals and minerals prices and trade.
Author: Lawrence WilliamsPosted: Wednesday , 29 Oct 2014
LONDON (Mineweb) -
Consensus opinion at last week’s Bloomberg East meets West seminar in London was that the latest growth figures from China, which have been considerably lower than those of the previous few years, are indeed the ‘new normal’ rather than just a downwards blip.
Government policy now seems to have abandoned the growth-at-any-costs scenario, which saw double digit GDP growth, to a more sustainable level which seems more likely to encompass annual growth figures of between 5% and 8%.
But even so, because of the size of its metallurgical processing and manufacturing sector China will remain the principal demand driver for global metals and minerals. This point was ably put by Bloomberg Intelligence’s global head of metals and mining, Ken Hoffman, in his introductory remarks, and was a point picked up by several other speakers and panel participants too.
Bloomberg notes that part of the problem facing the global resource sector is that perhaps the West did not understand the Eastern drive for growth over the past decade and its subsequent slowdown. This led to huge capital sums being expended in a rapid drive to take advantage of the seemingly unending super cycle, which many analysts and advisers suggested was here to stay, driven by that vast engine of growth that was China.
The super cycle may well not be dead, but taking a breather and reinventing itself as a lower period of continuing growth – nevertheless still a period of growth! Meanwhile many of the major global resource companies, which had grown fat on the back of mainly Chinese demand, were faced with capital cutbacks, deferrals and swinging cost reductions to bring them back into profitability and supply and demand back into near balance.
A number of prominent CEOs had to ‘walk the plank’, victims of circumstance perhaps more than stewardship, given they were pushed into their massive growth scenarios by the institutional investors who held much of their share capital. Scapegoats all!
They have been replaced by a new breed, briefed to concentrate on tighter capital and operating cost controls and this is having an inevitable impact on supply. With capital programmes cut right back, the metals and minerals to replace supply from aging and depleted mines may not be forthcoming in the medium and long term and we are already seeing prospective supply deficits looming for many of the base metals.
With the Chinese steel industry cutting back though, we are still seeing big price drops in bulk commodities of iron ore and coal and here the big players are in some cases increasing production as they can still be profitable at lower prices. But by so doing are effectively driving smaller companies and would-be developers out of business, thus increasing their longer-term dominance of the markets as and when prices pick up again. Again this timing is very much dependent on the Chinese steel industry returning to solid growth mode.
The East, again with China in the forefront, and together with Hong Kong (still treated separately from mainland China) and Singapore in particular, are also transforming metals trading options, Hoffmann noted. All these centres are coming up with new schemes to attract traders, many of which, said Hoffman, are ‘home runs’. The stimulus for all this has been the huge success of the Dalian iron ore contract elements of which are being transposed into the other trading centres and metals contracts.
With most metals demand in the East it is logical that trading will shift there. As Hoffman noted traders will follow and sooner or later will come a tipping point whereby the majority of the metals trade will be in the East. Bloomberg analysts suggest this will happen by 2020, if not sooner.
So, although Chinese growth has slowed this is now at a much more sustainable level and the corresponding fall in metals prices has, in most cases, led to a big cutback in new capital projects. Thus even this lower, but still positive, demand rate is still catching up fast with likely diminishing supply – indeed may have already passed it in some cases (nickel and possibly copper are examples). China’s huge growth engine, even operating at a much lower rate, will remain in the driving seat as far as demand is concerned and with metals trade rapidly moving eastwards too, China’s new normal may yet have an even stronger impact on metals and minerals markets and trades as the decade progresses.