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Mar 2005 - Demand for Metals

China’s almost insatiable demand for metals is expected to last at least another TEN YEARS !

Does anyone remember last years’ slowdown in China when it was all over? We wrote a column on the collapse that occurred in share prices and commodities within the 6-week period from 1 April to 19 May (as shown in Table 1). on page 15 of the June 2004 issue of “Paydirt” along the lines of that we thought it was supposed to be a super cycle with at least 12 months to go.

This was well before a super cycle became accepted knowledge, with the fall in prices based on China stating in March 2004 while we were on site with Sino Gold, that its targeted growth rate for 2004 was 7%, despite local comments that 9.8% was expected for 2004 (up from 9.1% in 2003, and 9.7% had already been achieved in the March quarter y-o-y). Our view was based on visiting mine sites in China and seeing first hand what was going on instead of estimating what was going on based on news releases.

I remember attending a presentation soon after in Australia and asking the representative presenter for a bank as to where their view of a collapse in commodity prices and the commodity market was being derived, as in when was the last time he had been to China? To which the presenter said that “he had never been to China, you don’t need to go there, since it is obvious based on economic theory what has to happen.”

Table 1. Some share price and commodity appreciations since 1 April 2004GDNmar05-1

There have been some comments that the current price strength in commodities is expected to last for at least another year, maybe two years. We wrote a column (perhaps overlooked) at the end of last year in the December 2004 / January 2005 issue of Paydirt, based on attending the China Mining Conference in Beijing in mid-November 2004. In that article, we commented from that conference :

“It was stated that China is currently in its first phase of growth with GDP rising by an average of 10%pa until 2020, in a similar way to the 30-year growth phases at 10%pa that have been experienced by Japan, Korea and Taiwan. From 2020, China was expected to increase its current growth rate into second phase growth”.

Or in other words, China is expected to continue its almost insatiable demand for metals for AT LEAST TEN MORE YEARS ! The growth path in China is something like the path of the 2,740km long Great Wall (a small part of which is shown in Figure 1), and currently it appears to be following a steady upward growth section, with a few pauses.

Figure 1. The Great Wall of China near BeijingGDNmar05-2

While it has to be acknowledged that stronger commodity prices mean that more marginal projects become viable, it is not that simple, since there are already major shortages of qualified personnel and tyres (you can buy trucks but not tyres, apparently Caterpillar allowed for 30% growth per year for Asia, but demand for trucks in Asia rose 5-fold last year putting everything into a serious backlog). Then there is the rising price of stainless steel itself for construction, with titanium reputedly requiring a 3 to 5-year lead time. Costs are rising, including explosives, even labour costs are rising in China.

It also has to be recognised that there are maximum spend limits and commissioning times to consider especially for base metal projects. The general rule of thumb is that the maximum capex that can be spent on constructing a project in a year is about US$0.5bn. Hence a US$1.5bn project is likely to take at least 3 years to construct, and if it is a base metal project, then it could take a further 3 years to build up to full capacity.

So, what of China and the Australian listed companies with exposure there. Although Chinese mining and smelting companies are accepted in the rest of the world and their funds sought to aid in the development of western world orebodies and projects, (with as recently as 4 March 2005, a China News report that almost half of the top 102 companies in China expected to have investments outside of China within the next 2 years), there is still market scepticism over the approval process for Australian companies projects and joint ventures in China.

Part of the scepticism is that it appears to take so long to gain approval, but in a world wide context it is more the fact that the market always wants it to have happened yesterday. It has been commented that no Australian company in China has yet received an ML in their own right, which is incorrect, Sino Gold (SGX) achieved one for Zhangjiashan (on strike from Jianchaling in Shaanxi Province) in their December Quarterly 2004, and is in the finalisation stages for Jinfeng having already received Project Development Approval and arranged the finance for Jinfeng. Michelago were hoping to have their BioGold approval before Chinese New Year, but have had to wait until after (~mid-March), before resuming their final approval processes.

In our opinion it is gradually happening, China wants western expertise to mine its orebodies and produce products more efficiently than it is currently doing, and appears likely to copy the knowledge and apply it to other operations and projects as soon as it has been acquired.

There certainly appears to be opportunities for the Australian listed companies that are exposed to China, and for those few companies that have made the break and those in project negotiations, they should be able to reap benefits within possibly about a two-or-three-year time gap as the market gradually gives them some recognition, before the majors move in and mop up.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is an Authorised Representative with Taylor Collison Ltd, and with his associates, holds interests in some of the stocks mentioned in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

  • Written by: Keith Goode
  • Tuesday, 01 March 2005