Base metals in a post super-cycle world – Lennon – by Geoff Canday (Mineweb.com – February 4, 2014)

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Jim Lennon discusses why demographics alone aren’t enough to recreate the massive type of growth in China that led to the super cycle.

CAPE TOWN (MINEWEB) – GEOFF CANDY: Hello and welcome to this Mineweb.com Newsmaker podcast, my name is Geoff Candy and joining me here live at the Cape Town International Convention Centre for the 2014 Mining Indaba is Jim Lennon, he’s the managing director at Red Door Research.

Jim, you’ve just done a presentation, the key note, about where we’re headed from a metals point of view, where the super-cycle is or if it’s going to come back, just generally speaking, the lay of the land. One of the things that struck from that is that it does seem to be moving very much from a demand-driven story to what’ s going to happening with supply over the next ten, 15, 20 years, is that a correct reading of things?

JIM LENNON: Partly, I think first China will continue to be a dominant factor on the demand side, the rates of growth in China were high double digit for the last ten years, we’re now seeing that slow down, so necessarily the growth rates are slowing. However, the volume required as a result of that slow growth because you’re working off the high base is still very, very high. So there’s still a challenge to meet supply. What has differentiated commodities is the extent to which supply has responded and I think the next phase of pricing if they are to recover is going to be driven by the extent to which supply can meet that demand, so supply is becoming a big issue.

Supply was an issue over the last decade because it wasn’t there, demand rose unexpectedly creating shortages in many commodities. We’re now beyond that shortage phase, we’re back in an oversupply phase. I think in the second half of this decade we could move into a modest shortage phase but not a massive shortage phase as we saw in the so-called super-cycle between 2003 and 2007.

GEOFF CANDY: Do you think…and obviously China being the major catalyst for that and the point was made – and well made – that it’s still growing, as you said, the volume effects are there and now it accounts roughly 50% of most of the commodity demand now, which puts things in perspective.

JIM LENNON: It does and a lot of people get very uncomfortable with China being such a large percentage of demand, given that it’s not 50% of the world population or 50% of GDP and, quite rightly, you’ve got to question why it’s so high. The answer is that China is going through a phase of development which is very metals-intensive and when you go back in time over the last hundred years and you looked at Europe, US, Japan, all the other developed economies that went through similar phases China is actually performing roughly in line with what those economies did.

So I feel quite comfortable that China still has growth potential, albeit, it’s got a lot of challenges including high debt levels, concerns about structuring of state-owned enterprises, all sorts of things like that, the government system, etc, all those things, the challenges. Nevertheless I think all the analysis that I’ve done would indicate that China’s growth will continue, albeit at a slower rate.

GEOFF CANDY: I suppose the other obvious question and the one you asked was is there somebody who can step into China’s shoes? Can this be repeated elsewhere? You did make the point that in Africa at least the same kind of population growth is there but it’s not just population growth?

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