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News from the Import Industry

August 25, 2009

Short View: Chinese commodities

For mining companies, the drop in commodities prices earlier this year has been, ironically, good long-term news. True, in the short term earnings have suffered and share prices have tanked. The FTSE 350 Mining Index was down 45 per cent between August 2008 and January this year.

But amid all the negative news there was, nonetheless, an encouraging clue about the limits of China’s domestic commodities output that paints a brighter outlook for the natural resources sector.

China’s geological endowment is critical for commodities companies as Beijing attempts to cap imports – and prices – supporting its domestic output. China is rich in iron ore, bauxite, zinc, nickel, coal and crude oil deposits.

Although the size of the country’s geological endowment matters, what really makes a difference is the price at which Chinese companies can dig out the raw materials. Until this year, the country’s capabilities were mostly untested as most of the recent increase in output came on the back of rising global prices since 2002.

The drop in global prices earlier this year has now revealed that China can only sustain high domestic production when global prices are near record highs.

As raw materials prices declined in late 2008 and early 2009, output from Chinese mines plunged because their mines were uncompetitive. This forced the country to rely heavily on imports, mopping up global surpluses and boosting prices.

The poor resilience of China’s local production to price crashes has been suspected for a long time. But the corroboration is great news for miners with high volume and low production cost assets, such as BHP Billiton and Rio Tinto.

www.ft.com/shortview

By Javier Blas - Published: August 24 2009 18:48

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