MAC: Mines and Communities

The Chinese resource supercycle slows down

Published by MAC on 2012-06-05
Source: Globe and Mail (2012-05-30)

As predicted for some time on MAC, the mining and materials' industries reliance on markets in China is at crisis point.

Demand has not only "slowed down" - but actually halted in  several key sectors.

For previous MAC article on the issue: London Calling muses on the future of Mining's Giants

For early warnings of the "down turn" in copper demand, see the prophetic warnings of Simon Hunt in 2009 at: London Calling applauds a Hunt for market truths

The Chinese resource supercycle slows down

By Carolynne Wheeler and Pav Jordan

Globe and Mail

27 May 2012

Beijing, Toronto - In the far corner of the Haidian district near Beijing’s North Fifth Ring Road highway, a young steel salesman, Sun Minglong, sits in the near-deserted storefront office for the Beijing Jicheng Heng Da Gang Tie Ji Tuan steel company.

The company’s warehouse, once brimming with steel building components, is now only one-third full, Mr. Sun laments. Beijing’s construction boom, in full force up until just a few months ago, has geared down sharply. Mr. Sun says sales are so slow these days, he no longer orders new stock unless a buyer requests it."The profits in steel are getting really bad now, because Beijing's housing market is slowing down. Nobody is building any houses because they don't make money anymore," Mr. Sun said. "Compared to last year there has been a real decline. Personally, I think it's going to get worse and worse."

The ripple effects from China's slowing economic growth are being felt from Beijing to British Columbia. At risk is a nearly decade-long run of unquenchable demand and high prices for a range of metals and other commodities, powered by relentless spending on homes, office towers, and transportation and communications infrastructure across China.

China's big build is maturing as capacity catches up with demand, even leaving entire residential and retail complexes nearly vacant due to a lack of buyers. That is beginning to backfire through parts of the global commodities supply chain that has fed China for the past decade.

"It's very hard to imagine how the price of non-food commodities could possibly be maintained," said Michael Pettis, a finance professor at Beijing University's Guanghua School of Management who predicts a collapse in commodity prices - perhaps as much as 50 per cent for copper, for example.

For the global mining industry, the worry is that the supercycle is ending.

"The stagnant growth outlook for China's infrastructure and property sectors, combined with construction-biased Chinese demand, marks the end of the Chinese commodity supercycle," Credit Suisse concluded in a recent report. Though China may still engineer a soft landing for its economy, the downshift is enough to upset a long-running favourable supply-and-demand picture. As China slows, commodities will bear the brunt of the pain, the firm said.

Booms and busts have always been a natural reality of the mining industry. The past decade, however, earned the industry buzzword "supercycle" for the unusually long run of demand and strong prices for metals, attributable in great part to China's unstoppable growth.

Canadian resource companies - some of the world's largest - were made richer with each pound of copper, zinc, nickel, iron ore and steel-making coal that China consumed. Today, though, investors are spooked by falling demand and mining shares have nosedived.

Inventories of copper and other metals in China are bursting. As evidence of slower Chinese growth piled up over the past three months, the mining-heavy materials index of the Toronto Stock Exchange slid about 20 per cent. Vancouver-based Teck Resources Ltd., a major supplier of steel-making coal and other metals to China, has seen its shares fall nearly 40 per cent from about year ago.

Shareholders of Canadian miner Sherritt International Corp. took the company to task at its annual meeting this week, complaining about a share price that has plunged about 45 per cent from levels last year when commodities were flying high.

"It's very hard to put together a really, truly, bullish, global economic outlook at this point in time," Sherritt chairman Ian Delaney said on the sidelines of the meeting.

Demand for metals in India has also slipped as its growth cools, and of course Europe's financial crisis and crumbling economy only makes matters worse.

For Canada, a fading supercycle is a concern for the many planned mining projects that promise to help keep the resources boom humming, creating jobs and attracting major spending and spinoff benefits for the broader economy. Miners have pledged billions of dollars of investments in coming years, from copper mines in British Columbia and graphite and gold mines in Northern Ontario to major iron ore projects in the far north and Labrador.

While most major mining companies say they're plowing ahead, danger signs are emerging. Just last week base metals miner HudBay Minerals Inc. called off a $400-million debt offering just days after it was announced, citing poor overall market conditions. The withdrawal of the offering puts long-term funding into question for the company's Peruvian copper project, where a full construction decision is due this year, analysts said.

BHP Billiton, the world's largest miner, this month said it was pausing a five-year, $80-billion (U.S.) expansion plan for its iron ore, coal, energy and base metals divisions amid concerns that commodity markets might cool further.

The move, echoed by other miners, was particularly telling because the company drafts spending budgets according to revenue expectations.

Earlier this week, Chinese buyers were reportedly deferring or defaulting on coal and iron ore deliveries after a drop in prices and as the economy showed signs of cooling even faster than previously expected.

"Certainly we've seen Chinese activity has been slower, for sure," said Michael Amm, a mining specialist at the Torys law firm.

"They're still out there, they are still doing things, but the pace is lower, and that was driving a lot of the exuberance and bidding up a lot of the prices."

Copper is trading at about $3.44 (U.S.) a pound, off from its 2011 heights of $4.65. The price of the metal, seen as a broad indicator of economic activity, is unlikely to plunge back to pre-supercycle lows near 60 cents a pound in 2003, analysts say.

But even modestly lower copper prices could inflict damage on the industry, since costs to operate mines around the world have shot up in recent years, squeezing profit margins.

In Beijing, cranes that until a few months ago were working full tilt to build apartment blocks and shopping malls in Beijing are now slowing.

"If newcomers are looking for jobs now, there's less work," said Wang Shaosheng, 35, as he relaxed with his crew on the front step of a nearly-finished high-rise apartment building within sight of the mountains that ring the city he came to six years ago from Henan province.

The group, on the site for a month, are happy to have found the job bricking the interior of residential buildings for a state-sponsored affordable-housing program as Beijing's property market slows and property developers abandon plans for new projects.

But China may not be able to afford another massive stimulus spending spree like the one that helped the country roar back from the global downturn of 2008.

"China has invested so much in infrastructure, further investment is not expected to have further returns," said Li Wei, an economics professor at Beijing's Cheung Kong Graduate School of Business. Instead, he said, the country needs to focus now on boosting domestic spending and cutting or removing some taxes.

Across China, steel companies are diversifying to mitigate losses, smelters are slowing or stopping production and bonded warehouses in Shanghai are overflowing. A plan to add 10,000 kilometres to China's national rail project, a program of great national pride, has been suspended for safety reviews or lack of funds.

An expected leadership transition later this year in China is also being watched closely, described by one mining executive as "just another question mark in a world characterized by question marks."

China's growth will be tempered, but few expect it to stop.

"I just can't see that it all comes to a halt and that we reset and we go back to a planet that has basically the United States and a fragmented Europe pulling the weight," said Mike White, chief executive officer of boutique investment bank IBK Capital. "We are in a new paradigm. We've taken the old cycle and we've simply stepped it up, and now we are within a new cycle."

While prices probably won't fall off a cliff like they did in some previous cycles, the mining industry can't insulate itself from a rocky stretch ahead.

"I don't think the Chinese government or the economy has figured out how to take the cyclicality out of human nature," said Sherritt's Mr. Delaney.

Carolynne Wheeler is a freelance writer based in Beijing


CNMC pulls $313mn Hong Kong IPO

The Chinese copper miner has delayed its planned Hong Kong IPO due to worsening market conditions, becoming the second major one to be scrapped in the city this week.

Reuters

30 May 2012

HONG KONG - Copper producer China Nonferrous Mining Corp has pulled its planned Hong Kong initial public offering of up to $313 million due to worsening market conditions, becoming the second major IPO to be scrapped in the city this week and underscoring tepid demand for new listings.

The decision comes days ahead of the pricing of Graff Diamonds up to $1 billion IPO, set to the Asia's biggest IPO this year.

CNMC, which has operations in Zambia, originally planned to finish taking orders for the deal on May 24, but extended the bookbuilding period to this week, Thomson Reuters publication IFR reported on Wednesday, citing sources involved in the transaction.

It follows automobile dealer China Yongda Automobiles Services, which on Monday scrapped its $434 million deal.

High-end jeweller Graff is set to price its IPO on Friday.

Europe's debt troubles and slower growth in China have turned investors cautious about IPOs, with deals volumes in Hong Kong, Asia's IPO capital, down more than 80 percent so far this year.

Hong Kong's benchmark Hang Seng index is down 9.7 percent since the beginning of May and on Wednesday alone dropped 1.9 percent. The slump in markets has made listed companies a better option for investors than those looking to go public, analysts and investors have said.

IPOs had their worst start in about four years in the Asia-Pacific region in 2012, with overall equity market activity down about a fifth from 2011.

ABC International, China International Capital Corp (CICC), JPMorgan and UBS were hired by CNMC to manage the IPO.


China's top aluminium province idles capacity as demand slumps

By Polly Yam

Reuters

24 May 2012

HONG KONG - China's top aluminium-producing province has idled about 700,000 tonnes of capacity in recent months, a senior industry official said, further evidence that slower growth in the world's No. 2 economy is denting the country's appetite for commodities.

The total reduction could rise to 1.2 million tonnes by the end of the year, Henan Nonferrous Metals Industry Association deputy chairman Liu Libin said, more than a quarter of the province's total capacity.

Slowing growth, along with a recent slump in prices, has sparked a string of deferrals and defaults on coal and iron ore deliveries to China and seen stocks of the minerals pile up in the country's ports.

Aluminium prices have joined a general slump for commodities, with London Metal Exchange metal down 15 percent from the year high hit in early March.

"Smelters that are still producing in Henan are big ones," Liu told Reuters.

"They are still able to maintain normal cash flows and are hoping the market will improve soon," he said, adding that local governments will support smelters as they want to maintain tax contributions and employment.

China is the world's largest producer of aluminium - used in the building, transport and packaging sectors - with a production capacity of more than 23 million tonnes a year.

Most of its smelting capacity sits at the high end of the global production cost curve, but many smelters have so far resisted closure, even though global producers Rio Tinto, Norsk Hydro and UC RUSAL have shaved output since the start of the year.

Norsk Hydro became the latest to announce a closure, saying on Wednesday it would shut its 180,000 tonnes a year Australian smelter.

Henan's move to shut plants illustrates how a combination of challenges, including sputtering demand at home and abroad, a production surplus and sliding prices are forcing smelters to bow to cost pressures.

State-backed research firm Antaike has estimated that less than one million tonnes of aluminium capacity in the country is currently shut, with capacity set to exceed real consumption by more than 2 million tonnes by the end of the year.

The supply glut has seen Shanghai exchange stocks of the metal AL-STX-SGH reach a near one-year high of 369,247 tonnes in April, before falling to 335,301 tonnes last week.

Other Provinces May Join

Henan, located in eastern central China, has 4.6 million tonnes of annual aluminium production capacity. Smelters there are among the most costly to run in China due to high electricity tariffs in the land-locked province.

Liu said some 700,000 to 800,000 tonnes of capacity in Henan was most vulnerable to production cuts as these smelters do not have their own power plants.

The price of front-month aluminium on the Shanghai Futures Exchange, which typically reflects spot prices in China, has fallen from a peak of over 24,000 yuan ($3,800) a tonne in 2008 to 15,950 yuan on Wednesday.

Smelters in other provinces may also join the production cull if domestic prices fall to 15,000 yuan a tonne for a prolonged period, Liu said.

For now, production cuts in Henan are being compensated by new smelters coming onstream, including some 600,000 tonnes of new capacity in the remote northwestern Xinjiang region.

However, sustained low prices could help balance China's supply, as more smelters idle capacity or delay the start of new production lines.

"The production cuts should peak at the end of the year. Imports may rise after that," said a source at large Henan smelter, which was also thinking of idling some capacity.

($1 = 6.3231 Chinese yuan) (Editing by Michael Urquhart)


Hanlong Mining delays $1.3bn Australia iron ore bid

By Sonali Paul and Narayanan Somasundaram

Reuters

24 May 2012

Melbourne/Sydney - China's Hanlong Mining has put back by six months a target date to seal a A$1.34 billion ($1.3 billion) takeover of Australian iron ore group Sundance Resources, as Chinese investment in Australian resource projects cools this year.

The firms said they had agreed to delay the takeover until November after Hanlong struggled to line up funding from China.

The long delay on the deal, first announced last July, points to China's reluctance to make big bets on risky resources projects offshore amid uncertainty over economic growth at home.

Global markets have been rattled by signs of slowing growth in the world's No.2 economy, which is casting a shadow over demand for commodities and led Premier Wen Jiabao to push forward key investment projects in a bid to revive growth.

Hanlong is targeting Sundance for its $4.7 billion Mbalam iron ore project on the border of Congo and Cameroon in western Africa, seen as a major new source of iron ore that could diversify China's dependence on Australia and Brazil.

The project, which includes building a 510 km (320 mile) rail line and a deep water port, has yet to secure key approvals from the two governments and backing from the Chinese Development Bank, all expected months ago.

Chinese interest in snapping up Australian assets has dropped sharply since last year, when Chinese takeovers of Australian metals and mining assets peaked at 40 deals worth $6.5 billion, according to Thomson Reuters data.

Nearly half way into 2012, Chinese bids have shrunk to $522 million, less than a tenth of last year's figure.

"The past urgency is missing," said a banker who had advised Chinese firms on several large deals in the last two years.

"Barely a year ago they would have stepped in, looked at the asset and if they saw potential, the Chinese would make the first bid which almost always looked compelling."

Sundance Chairman George Jones said the two main factors holding up Chinese funding were slow decisions from Cameroon and Congo setting licence conditions for Sundance and delayed approval from Australia's Foreign Investment Review Board.

Jones said the mining licence terms should be agreed next week, or early June at the latest, and expects Hanlong to win Foreign Investment Review Board approval by the end of June.

Speaking by phone from Perth, he said the firm's close work with Hanlong has "given us a lot of confidence that they do have the ability to deliver on this transaction."

Mid-November Target

Hanlong, which owns 18.6 percent of Sundance, had hoped to line up backing for the takeover from the China Development Bank last November, but has now pushed the deadline for that funding out to August 31.

Jones said Sundance now hopes to complete a deal by mid-November, having now established "a clearer understanding of the needs of China's National Development and Reform Commission and Hanlong's financiers, the China Development Bank."

Sundance's shares jumped 7.5 percent to A$0.43 as investors gained comfort the deal may still go ahead. But the shares were still 14 percent below Hanlong's offer price of A$0.50 a share.

Mbalam is expected to produce 35 million tonnes a year of iron ore. This compares with a forecast 55 million tonnes this year from Australia's Fortescue Metals Group, the world's number four iron producer.

The difficulties in getting big projects up and running in a rising cost environment have made Chinese firms and their lenders hesitant to make big new investments, China's ambassador to Australia, Chen Yuming, told Reuters in an interview this month.

Jones said the Chinese were just being prudent and he did not see the broader global uncertainty weighing on the deal or undermining China Development Bank's lending for deals in general.

Hanlong's bid for Sundance last year followed a string of Chinese bids for emerging Australian iron ore producers, as China's steel mills try to trim their dependence on the big three iron ore producers, Brazil's Vale and Anglo Australian giants BHP Billiton and Rio Tinto.

Rio Tinto and BHP, both in the midst of rapid expansions at their Australian iron ore operations, have recently flagged they remain bullish on the outlook for iron ore, despite slowing demand growth from China's steel mills.

However, BHP said the window for producers to tap into that demand growth had narrowed to 2025.

($1 = 1.0289 Australian dollars) (Editing by Ed Davies)

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