After spending $1 trillion since 2002 on projects to feed China’s commodity boom, the world’s mining companies have a lot riding on their biggest customer.
While commodities may be trading at five-year lows, the heads of three top miners BHP Billiton Ltd. (BHP), Vale SA (VALE3) and Rio Tinto Group (RIO) last week all backed China, the world’s second-biggest economy, to keep buying increasing amounts of their products deep into the next decade. Not everyone agrees.
“The commodity guys are just too optimistic,” Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong, said in an interview, without referring to particular companies.
As China moves to a consumer-led from an investment-led economy, there may be a substantial absolute drop in commodities demand, not just slower growth, he said. “This is happening now,” Tao said. “It’s just people are covering their eyes and refusing to believe that what is happening now is not just a cyclical story, but also a structural story.”
Goldman Sachs Group Inc. this year joined other banks in calling an end to the commodities supercycle as China slows. The biggest consumer of industrial metals and iron ore and the largest oil user after the U.S. is headed for the slowest full-year expansion since 1990.
China’s economic slowdown deepened in October as industrial output growth and fixed-asset investment trailed estimates. Australia & New Zealand Banking Group Ltd. last month cited slower-than-expected growth in China for slashing its price projections for commodities including oil, iron ore and nickel next year.
‘Supernormal’ Demand
China’s “supernormal” commodities’ demand since 2002 will return to normal as the economy matures, according to a Goldman Sachs report in October. The bank expects China to take only its share of global GDP – about 13 percent in 2013 – in mining sector demand, down from as much as 60 percent at the peak of the boom. The trajectory of Chinese demand over the next 10-15 years will continue to call the tune, it said.
“China’s metal consumption per unit of GDP peaked in 2011-2012, indicating infrastructure investment’s contribution to the economy has started to shrink,” said Ma Kai, a Beijing-based analyst with China International Capital Corp.
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