The Chinese resource supercycle slows down – by Carolynne Wheeler and Pav Jordan (Globe and Mail – May 26, 2012)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

In the far corner of the Haidian district near Beijing’s North Fifth Ring Road highway, a young steel salesman, Sun Minglong, sits in the near-deserted storefront office for the Beijing Jicheng Heng Da Gang Tie Ji Tuan steel company.

The company’s warehouse, once brimming with steel building components, is now only one-third full, Mr. Sun laments. Beijing’s construction boom, in full force up until just a few months ago, has geared down sharply. Mr. Sun says sales are so slow these days, he no longer orders new stock unless a buyer requests it.

“The profits in steel are getting really bad now, because Beijing’s housing market is slowing down. Nobody is building any houses because they don’t make money anymore,” Mr. Sun said. “Compared to last year there has been a real decline. Personally, I think it’s going to get worse and worse.”

The ripple effects from China’s slowing economic growth are being felt from Beijing to British Columbia. At risk is a nearly decade-long run of unquenchable demand and high prices for a range of metals and other commodities, powered by relentless spending on homes, office towers, and transportation and communications infrastructure across China.

China’s big build is maturing as capacity catches up with demand, even leaving entire residential and retail complexes nearly vacant due to a lack of buyers. That is beginning to backfire through parts of the global commodities supply chain that has fed China for the past decade.

“It’s very hard to imagine how the price of non-food commodities could possibly be maintained,” said Michael Pettis, a finance professor at Beijing University’s Guanghua School of Management who predicts a collapse in commodity prices – perhaps as much as 50 per cent for copper, for example.

For the global mining industry, the worry is that the supercycle is ending.

“The stagnant growth outlook for China’s infrastructure and property sectors, combined with construction-biased Chinese demand, marks the end of the Chinese commodity supercycle,” Credit Suisse concluded in a recent report. Though China may still engineer a soft landing for its economy, the downshift is enough to upset a long-running favourable supply-and-demand picture. As China slows, commodities will bear the brunt of the pain, the firm said.

Booms and busts have always been a natural reality of the mining industry. The past decade, however, earned the industry buzzword “supercycle” for the unusually long run of demand and strong prices for metals, attributable in great part to China’s unstoppable growth.

Canadian resource companies – some of the world’s largest – were made richer with each pound of copper, zinc, nickel, iron ore and steel-making coal that China consumed. Today, though, investors are spooked by falling demand and mining shares have nosedived.

Inventories of copper and other metals in China are bursting. As evidence of slower Chinese growth piled up over the past three months, the mining-heavy materials index of the Toronto Stock Exchange slid about 20 per cent. Vancouver-based Teck Resources Ltd., a major supplier of steel-making coal and other metals to China, has seen its shares fall nearly 40 per cent from about year ago.

For the rest of this article, please go to the Globe and Mail website:

Comments are closed.