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Friday, 20 February 2009
China works to avert another commodity spike
China, which triggered the biggest commodity price spike in a generation, is now making deals that could prevent another surge in the coming decade by helping finance new production during the low ebb of the cycle.
(SINGAPORE) China, which triggered the biggest commodity price spike in a generation, is now making deals that could prevent another surge in the coming decade by helping finance new production during the low ebb of the cycle.
While the deepening global recession has focused traders on trying to pick a bottom to the current price collapse, more far-sighted analysts have already begun ringing alarm bells over the cancelled investments and delayed projects that threaten to leave the world short of raw materials once growth resumes.
Enter China, which has committed up to US$55 billion over the past week in a slew of deals to help cash-strapped producer nations or companies weather the over 60 per cent collapse in resource prices. That sum is almost identical to the expected drop in global capital spending among oil and gas companies this year, according to a Barclays Capital survey.
By investing through a downturn that veterans say has reinforced the ‘feast or famine’ nature of commodities markets, China is helping head off another surge before it happens.
‘Look at iron ore. In the past BHP and Rio have increased output more incrementally,’ Mark Pervan, senior commodity analyst at ANZ Bank said. ‘With support from a major customer, which is also an owner, they might take a more aggressive approach to expansion and development during a downturn.’
He said China did not want to see a repeat in the volatility and extent of price rises of the past two to three years. ‘Like any consumer, they want price stability. They also want first say on supply and of course this is a perfect time for them to be buying.’
China’s investment abroad is nothing new, but most firms have been on hiatus for the past several years as prices soared. The broad Reuters-Jefferies CRB index surged 50 per cent in the year to July 2008, the biggest spike since the early 1970s.
But since then, it has more than halved to a six-year low, spurring a renewed wave of Beijing-backed deal making.
A week ago state-owned Chinalco unveiled a US$19.5 billion investment in Rio Tinto for minority stakes in some of Rio’s most prized assets, including a slice of the world’s biggest copper mine, Escondida; days later state-owned trading house Minmetals agreed to buy Australia’s debt-laden OZ Minerals Ltd, the world’s No. 2 zinc miner, for US$1.7 billion.
China has also closed a months-long deal to lend Russian oil companies US$25 billion in return for East Siberian supplies from the world’s No. 2 exporter; and is finalising a deal to extend a US$10 billion line of credit to Brazil’s state-owned Petrobras for future supplies. Few expect the investments to end there.
For the many commodity companies that have been forced to scale back or scrap investment plans due to illiquid credit markets or corporate distress, Chinese investment is a short-term lifeline - but one that comes with expectations of supply security and possibly price stability further down the road.
‘We have set ourselves up for big price rises once things recover. The first thing the mining companies did was to cut capital expenditure and slow output,’ Gerard Burg, analyst at National Australia Bank said. ‘If the new owners take a more strategic view, we may see more spending through the trough and supply can respond more quickly when the demand picture improves,’ Mr. Burg said.
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China works to avert another commodity spike
Reuters
20 February 2009
(SINGAPORE) China, which triggered the biggest commodity price spike in a generation, is now making deals that could prevent another surge in the coming decade by helping finance new production during the low ebb of the cycle.
While the deepening global recession has focused traders on trying to pick a bottom to the current price collapse, more far-sighted analysts have already begun ringing alarm bells over the cancelled investments and delayed projects that threaten to leave the world short of raw materials once growth resumes.
Enter China, which has committed up to US$55 billion over the past week in a slew of deals to help cash-strapped producer nations or companies weather the over 60 per cent collapse in resource prices. That sum is almost identical to the expected drop in global capital spending among oil and gas companies this year, according to a Barclays Capital survey.
By investing through a downturn that veterans say has reinforced the ‘feast or famine’ nature of commodities markets, China is helping head off another surge before it happens.
‘Look at iron ore. In the past BHP and Rio have increased output more incrementally,’ Mark Pervan, senior commodity analyst at ANZ Bank said. ‘With support from a major customer, which is also an owner, they might take a more aggressive approach to expansion and development during a downturn.’
He said China did not want to see a repeat in the volatility and extent of price rises of the past two to three years. ‘Like any consumer, they want price stability. They also want first say on supply and of course this is a perfect time for them to be buying.’
China’s investment abroad is nothing new, but most firms have been on hiatus for the past several years as prices soared. The broad Reuters-Jefferies CRB index surged 50 per cent in the year to July 2008, the biggest spike since the early 1970s.
But since then, it has more than halved to a six-year low, spurring a renewed wave of Beijing-backed deal making.
A week ago state-owned Chinalco unveiled a US$19.5 billion investment in Rio Tinto for minority stakes in some of Rio’s most prized assets, including a slice of the world’s biggest copper mine, Escondida; days later state-owned trading house Minmetals agreed to buy Australia’s debt-laden OZ Minerals Ltd, the world’s No. 2 zinc miner, for US$1.7 billion.
China has also closed a months-long deal to lend Russian oil companies US$25 billion in return for East Siberian supplies from the world’s No. 2 exporter; and is finalising a deal to extend a US$10 billion line of credit to Brazil’s state-owned Petrobras for future supplies. Few expect the investments to end there.
For the many commodity companies that have been forced to scale back or scrap investment plans due to illiquid credit markets or corporate distress, Chinese investment is a short-term lifeline - but one that comes with expectations of supply security and possibly price stability further down the road.
‘We have set ourselves up for big price rises once things recover. The first thing the mining companies did was to cut capital expenditure and slow output,’ Gerard Burg, analyst at National Australia Bank said. ‘If the new owners take a more strategic view, we may see more spending through the trough and supply can respond more quickly when the demand picture improves,’ Mr. Burg said.
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