With the world still smarting from the financial crisis, can China lead the way to a revival of commodities prices?
Yan Jiangning, Caijing 11 February 2009
It was a rollercoaster ride for commodity markets in 2008. The first half of the year saw them float atop increasing prices and rising earnings. That ascent came to a grinding halt midway through the year, with the second half overshadowed by disappointments.
In July, copper futures surged to a record US$ 8,940 per ton on the London Metal Exchange, only to plunge into a steep decline over the next few months. Copper’s price shed 23 percent in October, and by the end of the year, it had settled at about US$ 3,000 per ton, down almost 60 percent from its peak.
The situation was similar for other commodities such as aluminum, iron ore and crude oil. The Baltic Dry Index (BDI), a key barometer of commodity shipping rates, slumped to 600 points in December, from a record 10,000 points in May.
Goldman Sachs said in its recent report that the commodity markets are moving from “demand destruction” to “supply destruction,” as suppliers are hastily curtailing production in hopes of boosting prices amid the demand drop. These cuts should help market prices rebound by 2010, said Goldman.
According to JP Morgan, a revival of the metal markets will depend on their ability to consume inventories and reduce supply. More important for a sustained recovery is the backing of strong economic growth.
However, it is widely believed that commodity prices will be unable to attain the levels reached in 2008. Xue Ye, mining industry analyst from JL McGregor & Company, told Caijing that in addition to fundamental factors, last year’s surge got a lift from a depreciating U.S. dollar as well as market speculation.
Now, with the dollar stabilizing and speculative capital beating a retreat, commodity prices are unlikely to see a quick revival over the next two years. The implication of the slump is clear: The impact of the U.S. subprime crisis has expanded from the financial world to the real economy.
China as Hope
On October 15, 2008, Rio Tinto CEO Tom Albanese said his company would revaluate its business strategy in light of its belief that the Chinese economy is not immune from the global recession. His statement sent share prices of major mining companies sliding. Rio Tinto’s share price in London lost 17 percent on the day. BHP’s share price dropped 15 percent, while the mining index FTSE 350 fell 17 percent.
But many others are counting on China to play an important role in the revival of commodity markets, as the country has grown into the world largest steel and electrolytic aluminum producer, and the biggest consumer of copper.
“Although China can’t play a role as the saviour in world economy, it may become an important factor to block the deterioration,” said John Johnson, CEO of the Commodities Research Unit (CRU) in China.
The CRU has forecasted that, while global commodity consumption will shrink, China’s own consumption will continue to grow at level high above the average. Worldwide electrolytic aluminum consumption will decline 0.1 percent in 2009, said the CRU, but China should still see 4.4 percent growth. China’s copper consumption will likely rise 5.5 percent despite a global decline, and the country’s steel production will increase 4 percent year on year, exceeding the global average of 0.8 percent.
International mining giants are also counting on China’s 4 trillion yuan stimulus package to boost the market. “We expect the demand for commodities to rebound in the second half of 2009,” said Vivek Tulpule, chief economist of Rio Tinto.”Especially when capital is poured into railway construction and housing projects in line with the 4 trillion investment plan, demand for commodities such as steel and copper will rise.”
Opportunity for Mergers
Chinese companies increased expansion in the international resources market during the first half of 2008. In July, China’s leading steel company Sinosteel made a successful, US$ 1.3 billion bid for Australian iron miner Midwest. Before that, Aluminum Corp of China (Chalco), together with Alcoa, bought a 12 percent stake of global mining giant Rio Tinto for US$ 14 billion.
However, slumping commodity markets have since hindered merger deals in the mining sector. On November 25, BHP announced it was abandoning a plan to buy into Rio Tinto, a deal valued at about US$ 188 billion. By then, Rio Tinto’s share price had decline by 70 percent from what Chalco paid.
Market decline has also put a dent in financing efforts. According to Patrick Loftus-Hills, a managing director with UBS Investment Bank, 16 of the bank’s mining customers have postponed their IPO plans in the Asian market. Mining companies can expect an improved capital market no earlier than late 2009, he predicted.
Declining market prices and worsening financing channels have put many small mining companies to the verge of bankruptcy. But some experts say this might be a good opportunity for Chinese companies to continue their expansion overseas.
Tim Goldmith, the global mining leader at PricewaterhouseCoopers, told Caijing that global resources prices will remain low throughout the year, and Chinese companies should take advantage of these cheap goods as soon they can.
China’s state-owned oil companies may have an especially good chance to buy independent oil firms overseas, said Ian Sperling-Tyler, oil & gas director in Deloitte. According to Ian Sperling-Tyler, the market values of 19 independent oil firms listed on London Stock Exchange are all lower than their net assets now.
Chinese companies don’t seem remiss of the opportunity. In November 2008, China’s Shougang Group bought Mount Gibson Iron Ltd. at AU$ 163 million. The offer was about one forth of the price that Shougang initially proposed in early 2008.
Anshan Iron & Ore Group and Wuhan Iron & Ore Group have also acquired iron ore assets in Australia. In November, Shagang Group, China’s largest private steel company, also won rights to a mining asset in Australia with reserves of 13 million tons.
“It is a good time to purchase ore resources overseas as prices are low, and it will help steel companies to reduce material costs in the future,” said one steel industry source.
But some industry experts warned that Chinese companies should remain cautious with overseas acquisitions. “Many foreign companies are counting on Chinese firms to pay more, and that will create investment risks,” said an expert.
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Commodity: A Rollercoaster Ride
With the world still smarting from the financial crisis, can China lead the way to a revival of commodities prices?
Yan Jiangning, Caijing
11 February 2009
It was a rollercoaster ride for commodity markets in 2008. The first half of the year saw them float atop increasing prices and rising earnings. That ascent came to a grinding halt midway through the year, with the second half overshadowed by disappointments.
In July, copper futures surged to a record US$ 8,940 per ton on the London Metal Exchange, only to plunge into a steep decline over the next few months. Copper’s price shed 23 percent in October, and by the end of the year, it had settled at about US$ 3,000 per ton, down almost 60 percent from its peak.
The situation was similar for other commodities such as aluminum, iron ore and crude oil. The Baltic Dry Index (BDI), a key barometer of commodity shipping rates, slumped to 600 points in December, from a record 10,000 points in May.
Goldman Sachs said in its recent report that the commodity markets are moving from “demand destruction” to “supply destruction,” as suppliers are hastily curtailing production in hopes of boosting prices amid the demand drop. These cuts should help market prices rebound by 2010, said Goldman.
According to JP Morgan, a revival of the metal markets will depend on their ability to consume inventories and reduce supply. More important for a sustained recovery is the backing of strong economic growth.
However, it is widely believed that commodity prices will be unable to attain the levels reached in 2008. Xue Ye, mining industry analyst from JL McGregor & Company, told Caijing that in addition to fundamental factors, last year’s surge got a lift from a depreciating U.S. dollar as well as market speculation.
Now, with the dollar stabilizing and speculative capital beating a retreat, commodity prices are unlikely to see a quick revival over the next two years. The implication of the slump is clear: The impact of the U.S. subprime crisis has expanded from the financial world to the real economy.
China as Hope
On October 15, 2008, Rio Tinto CEO Tom Albanese said his company would revaluate its business strategy in light of its belief that the Chinese economy is not immune from the global recession. His statement sent share prices of major mining companies sliding. Rio Tinto’s share price in London lost 17 percent on the day. BHP’s share price dropped 15 percent, while the mining index FTSE 350 fell 17 percent.
But many others are counting on China to play an important role in the revival of commodity markets, as the country has grown into the world largest steel and electrolytic aluminum producer, and the biggest consumer of copper.
“Although China can’t play a role as the saviour in world economy, it may become an important factor to block the deterioration,” said John Johnson, CEO of the Commodities Research Unit (CRU) in China.
The CRU has forecasted that, while global commodity consumption will shrink, China’s own consumption will continue to grow at level high above the average. Worldwide electrolytic aluminum consumption will decline 0.1 percent in 2009, said the CRU, but China should still see 4.4 percent growth. China’s copper consumption will likely rise 5.5 percent despite a global decline, and the country’s steel production will increase 4 percent year on year, exceeding the global average of 0.8 percent.
International mining giants are also counting on China’s 4 trillion yuan stimulus package to boost the market. “We expect the demand for commodities to rebound in the second half of 2009,” said Vivek Tulpule, chief economist of Rio Tinto.”Especially when capital is poured into railway construction and housing projects in line with the 4 trillion investment plan, demand for commodities such as steel and copper will rise.”
Opportunity for Mergers
Chinese companies increased expansion in the international resources market during the first half of 2008. In July, China’s leading steel company Sinosteel made a successful, US$ 1.3 billion bid for Australian iron miner Midwest. Before that, Aluminum Corp of China (Chalco), together with Alcoa, bought a 12 percent stake of global mining giant Rio Tinto for US$ 14 billion.
However, slumping commodity markets have since hindered merger deals in the mining sector. On November 25, BHP announced it was abandoning a plan to buy into Rio Tinto, a deal valued at about US$ 188 billion. By then, Rio Tinto’s share price had decline by 70 percent from what Chalco paid.
Market decline has also put a dent in financing efforts. According to Patrick Loftus-Hills, a managing director with UBS Investment Bank, 16 of the bank’s mining customers have postponed their IPO plans in the Asian market. Mining companies can expect an improved capital market no earlier than late 2009, he predicted.
Declining market prices and worsening financing channels have put many small mining companies to the verge of bankruptcy. But some experts say this might be a good opportunity for Chinese companies to continue their expansion overseas.
Tim Goldmith, the global mining leader at PricewaterhouseCoopers, told Caijing that global resources prices will remain low throughout the year, and Chinese companies should take advantage of these cheap goods as soon they can.
China’s state-owned oil companies may have an especially good chance to buy independent oil firms overseas, said Ian Sperling-Tyler, oil & gas director in Deloitte. According to Ian Sperling-Tyler, the market values of 19 independent oil firms listed on London Stock Exchange are all lower than their net assets now.
Chinese companies don’t seem remiss of the opportunity. In November 2008, China’s Shougang Group bought Mount Gibson Iron Ltd. at AU$ 163 million. The offer was about one forth of the price that Shougang initially proposed in early 2008.
Anshan Iron & Ore Group and Wuhan Iron & Ore Group have also acquired iron ore assets in Australia. In November, Shagang Group, China’s largest private steel company, also won rights to a mining asset in Australia with reserves of 13 million tons.
“It is a good time to purchase ore resources overseas as prices are low, and it will help steel companies to reduce material costs in the future,” said one steel industry source.
But some industry experts warned that Chinese companies should remain cautious with overseas acquisitions. “Many foreign companies are counting on Chinese firms to pay more, and that will create investment risks,” said an expert.
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