Miners told to brace for “new normal” demand trends

By Laura Syrett
Published: Monday, 27 October 2014

The beginning of China’s economic restructuring plan is already squeezing miners and mining equipment companies, but analysis by industry commentators suggests that this is the start of a new status quo in terms of mineral demand and trading, rather than a temporary blip.

China’s decision to embark on further economic restructuring is sending shudders through global commodities markets and mining groups have been warned that they must either adapt to this change or die.

Attendees at the annual LME Week heard how London's dominance in 
metals and minerals trading could soon move East (source: Tim Morris).
Speaking before an audience of miners, bankers and traders during the annual London Metals Exchange (LME) Week, Ken Hoffman, global head of metals and mining at Bloomberg Intelligence said that the industry was facing a shift in the existing East-West trading relationship.

“This is a new, more conservative China,” Hoffman told delegates at Bloomberg’s “East meets West” forum, explaining that this refocused China will not pursue growth at any cost.

He said that the current Chinese administration would put an end to the practices of building ghost cities, churning out too much steel to be consumed and exporting its raw natural resources for use by more mature economies.

“This [shift] has had a huge impact on the steel industry, where domestic demand is on a path to decline in 2014 for the first time since the financial crisis,” Hoffman said, pointing to the toll this is taking on the miners that produce the minerals used in steelmaking.

“Miners need to react to the new normal in China and change their plans,” he added.

The West was caught off guard because of its lack of understanding of the East during the last decade, Hoffman said, causing overbuilding of capacity and hundreds of billions of dollars of investment to be written off.

Hoffman said that a key indicator of forced change in the mining industry was capex spending, which has already fallen by 22% so far this year.

“This is just the start,” he said, predicting that many miners will now be forced to go on a “starvation diet” in the next year and that, as a result, capex figures are set to “fall off a cliff”.

Such projections are grim omens for mining services and equipment companies, which are already starting to feel hunger pangs caused by the frugality of their customers.

Chinese changes

A principal area of concern highlighted during LME Week was the slowing pace of growth in China.

While metals and minerals industry insiders and commentators said they were confident that China will continue to grow, the rate of economic expansion would be weaker, although unreliable data makes it difficult to estimate how much growth will contract.

“It’s difficult to know what China’s numbers are – the figures are quite rubbery,” Jim Lennon, consultant at Macquarie Capital Europe Ltd said during a panel at the Bloomberg meeting.

He said that China’s exponential expansion of low grade, high production cost mineral ores had left many domestic mining companies vulnerable and that far tighter credit in the country this year was putting many out of business.

For Western miners, majors with robust balance sheets and available finances may be able to take advantage of this situation, Hoffman suggested.

He pointed to Rio Tinto’s intention to ramp up its iron ore output in a move that will bring down average costs per tonne and is likely to put higher cost rivals out of business.

Paul Gait, senior research analyst at Sandford C Bernstein, said that iron ore may not be exceptional in this respect and that the mining industry could see this aggressive marketing extended to other minerals as companies compete for market share in the face of waning demand.

Trading moves East

While its role in consumption looks likely to moderate over the next decade, Hoffman said that Asia is looking to play a greater role in international commodities exchange trading.

This trend is already underway in China, which has recently launched a number of new minerals and metals exchanges, has started to clear its warehouse channels and is seeking to make the yuan renminbi an international currency.

According to Bloomberg’s analysis, in 2013 half of all LME Week attendees were from Asia, with a third coming from China, Hong Kong and Singapore.

Hoffman noted that Asia now accounts for 70% of consumption in a number of mineral and metal markets and Asian bourses are beginning to leach business from traditional trading centres in London, New York, Chicago and Toronto.

Bonnie Liu, senior vice president for Asia commodities at Hong Kong Exchanges and Clearing Ltd (HKEx), which now owns the LME, said that the Hong Kong bourse was looking to inject Eastern liquidity into Western metal markets, partly through brokering contracts in China.

“There is no free capital flow in China yet,” she explained, adding that Hong Kong was in a position to provide an offshore trading facility for metal and mineral deals looking for Chinese funds.

In the meantime, many Western mining companies are likely to face meagre prospects, panellists agreed and in the longer term, many are likely to find themselves competing with Chinese companies to buy new projects.

“China is aiming to become a re-exporter in a number of markets,” Hoffman said, noting that it remains to be seen what the wider impact of this will be on the wider mining and minerals industry.

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