Mining investors start to sweat over Chinese roulette
April 15, 2004
By Reuters
Sydney - Mining stocks have had a shaky start to the year as worries about big spending plans to cater to China's commodities gold rush collide with fears that demand for copper, nickel and other raw materials may have peaked.
Investors have bet big on Alcoa, BHP Billiton, Rio Tinto and other mining houses, which have in turn spent big to match long-term growth projections in Chinese demand for commodities.
At the moment it is hard to see beyond the blue sky as China and the resurging rust belt sectors of the US, Europe and Asia gobble up all the iron ore, copper, nickel and zinc that mining firms can run through their mills and smelters.
"It's all about China at the moment; the country just can't get enough," says Keith Goode, an analyst with Eagle Mining Research in Sydney.
But questions over the sustainability of China's rate of consumption growth are beginning to creep into forecasts, despite the insistence by mining houses that China's appetite will continue to surge. For now, the dramatic rise in metals prices supports their optimism.
And returns on equity from mining companies have been slim. The FTSE mining index went flat in the first quarter after rising 26 percent last year. Industry heavyweight Rio Tinto's Australian shares were down 5.4 percent in the first quarter, while its London shares were off 8.2 percent.
Alcoa, which is helping to build aluminium smelters in China and is shipping vast tonnages of alumina into the country, has recoiled 1.94 percent, while Canadian rival Alcan has slipped 1.9 percent.
"This is not going to change and it's not because they are not investing in good properties or good projects, they are.
It's just that they never get the timing right," says David Davidson, an analyst at Paradigm Capital in Toronto.
But BHP Billiton has been an exception, gaining 4.37 percent in Australia and 7.58 percent in London.
Dave Tunnington, the resource fund manager at Old Mutual Asset Managers in Cape Town, is optimistic.
"In the next 10 years, the environment is a lot better for resource shares than it has been over the last decade," Tunnington says.
"The long-term story is good, but within that environment you'll still have cycles."
Not surprisingly, mining companies have committed hundreds of millions - and in some instances billions - of dollars to expand old mines and dig new ones.
On copper mining in Chile alone, BHP Billiton has earmarked $500 million (about R3.2 billion) to retrieve traces of copper from a mountain of spent ore at its Escondida lode starting in 2006. Minority partner Rio Tinto is contributing $261 million. Last year the partners spent $1 billion expanding Escondida.
But London-based researcher Bloomsbury Minerals Economics says supply shortfalls should get smaller next year.
Copper and tin have hit eight-and-a-half-year highs on the London Metal Exchange this year. Aluminium has scaled a peak it last saw six and a half years ago and nickel has reached its best level for 15 years. Silver is at its highest in 16 years and platinum has not been so expensive since 1980.
Gavin Wendt, a director of Australian broker Intersuisse, says the key issues boosting the resource sector are commodity strength and strong demand from China.
But prices may ease next year as governments cut spending, according to Access Economics. By December 2005, this may take the aluminium price down 2 percent, copper down 6 percent and nickel down 12 percent.
Falls of more than 20 percent are projected in lead, oil, platinum, silver, copper and nickel in the two years to mid-2006.
These declines coincide with expectations for slower growth in China's broad money supply and in fixed asset spending, which may spell less frenzied economic activity, analysts say.
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