Chinas 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.
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.
|Attendees at the annual LME Week heard how
London's dominance in
metals and minerals trading could soon move East
(source: Tim Morris).
This is a new, more conservative China, Hoffman
told delegates at Bloombergs 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.
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
Its difficult to know what Chinas 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 Chinas 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 Tintos 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 Bloombergs 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