Hubris led to destruction of investors’ money by mining groups – by Kunal Bose (Business Standard – September 7, 2015)

http://www.business-standard.com/

The onset of boom led the world’s leading mining groups to be on a capital expenditure binge to dig out new mines

Inspired by one single factor of voracious Chinese appetite ranging from oil to all minerals used in making metals, the now-ended commodity boom began in 2003. The onset of boom led the world’s leading mining groups to be on a capital expenditure binge to dig out new mines.

But the slowdown of the world’s second largest economy, as Beijing turns focus from investment to consumer-led growth, gives the feeling that earlier, long years of high mineral prices supported by growing demand led miners to drink Chinese potion to reach iridescent highs.

Their thought then was Chinese demand would continue to grow at high rates far into the future to justify colossal investments in mines’ capacity building. Chinese growth has now downshifted to a level not seen in a quarter century and that is proving to be a hard awakening for miners from their hallucinatory past.

Not very long ago, mining chief executives thought their investment in dredging more and more iron ore from the earth stood no chance of going wrong, since China was expected to be a one billion tonne (bt) steel producer by 2030. Rio Tinto’s iron ore business chief Andrew Harding said earlier this year that China needed annual steel demand growth of only one per cent to reach that goal in the next 15 years.

Investment bank UBS disagrees with the proposition, saying, “Our analysis shows that Chinese steel production has already reached a turning point”. Finding China at a crossroads in its development, UBS has cut its forecast for compound annual steel production growth rate for the next five years for the country from 1.4 per cent to zero per cent.

For iron ore producers, Chinese steel reality is turning out to be more damning. In the first seven months of 2015 up to July, Chinese steel production was down on a year-on-year basis by 1.7 per cent to 476 million tonnes (mt).

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