Miners Keep Their Bets
on China
By NICK TREVETHAN |
REUTERS
Published: June 20, 2011
SINGAPORE — Nouriel
Roubini, the professor of economics at New York University who warned about the
risks of a financial crisis, is cautious about China, but resource companies
are betting billions that rapid urbanization and economic growth will soak up
the country’s spending on infrastructure projects and prevent a hard economic
downturn.
They are buying up
competitors, investing in new capacity and speeding the pace of expansion
projects to feed the strong growth in China’s demand for raw materials.
In the past week,
Noble Group, Nyrstar, Rio Tinto and Xstrata have announced plans to expand
output or capacity — risky bets if Mr. Roubini’s vision for China proves
accurate.
“There is a meaningful
probability of a hard landing in China after 2013,” Mr. Roubini told a
financial conference in Singapore. He is closely followed on Wall Street
because he predicted the U.S. housing meltdown that precipitated the global
economic crisis.
But his warnings are
at odds with the actions of raw material producers.
Australian mining
investment grew to $50 billion in 2010 from $20 billion in 2009, “and that
suggests the miners don’t think Roubini’s scenario will play out,” said Ben
Westmore, a commodities economist at National Australia Bank. “Those plans are
likely predicated on some slowing in prices, but there is still obviously a lot
of money to be made.”
The strong demand in
China has helped bolster a commodities boom in the past seven years, with
copper prices rising to records above $10,000 a ton, only briefly interrupted
by the global financial crisis, from about $2,500 a ton.
Iron ore prices have
leapt to almost $200 a ton from $32 in 2004.
Rio Tinto, one of the
world’s largest iron ore miners, is speeding up plans to expand iron ore
production 50 percent to 333 million tons a year by the first half of 2015, six
months ahead of its earlier target. “The demand outlook continues to be strong,
with supply lagging elsewhere in the industry, and we are seeing new supplies
proving slower to materialize than predicted,” said Sam Walsh, the head of Rio
Tinto’s iron ore division.
Xstrata plans to start
exporting more iron ore to Asian buyers from Australia on Wednesday as part of
a redesign of its Ernest Henry copper and gold mine in the northeastern part of
the country, the company said. The upgrade cost 589 million Australian dollars,
or $620 million.
Exports of the
magnetite-type material at a rate of 1.2 million tons a year are a major
component of Xstrata’s plan to transform the Ernest Henry mine from an open-cut
design to an underground one, the company said.
Other companies are
also seeking to expand capacity through mergers, including Nyrstar, the world’s
biggest zinc producer, which wants to acquire Breakwater Resources of Toronto
for 619 million Canadian dollars, or $630 million, as it carries out its
strategy to buy more mines and increase self-sufficiency.
Mr. Roubini said
investment was already at 50 percent of China’s gross domestic product and that
sixty years of data had shown that overinvestment led to hard landings, citing
the Soviet Union in the 1960s and ’70s, and East Asia before the 1997 financial
crisis.
“I was recently in
Shanghai and I took their high-speed train to Hangzhou,” he said,
referring to a line that has cut traveling time between the two cities to less
than an hour from four hours previously.
“The brand new
high-speed train is half-empty and the brand new station is three-quarters
empty. Parallel to that train line, there is a also a new highway that looked
three-quarters empty. Next to the train station is also the new local airport
of Shanghai and you can fly to Hangzhou.”
But other analysts
have argued that China’s immense urbanization program meant that although some
infrastructure projects might be underutilized at present, the projects would
gain users in the years to come.
“You don’t build
infrastructure expecting to run at capacity on Day 1,” said an analyst in
Shanghai, who was not authorized to speak to the news media. “You build based
on future demand.
“The other question
you need to ask is what is a hard landing for an economy growing at 10 percent?
Is it a slowdown to 5 percent? Even that implies, assuming demand for
commodities rises in line with G.D.P., an additional 400,000 ton of copper or
more than 30 million ton of iron ore. China is about ‘boomsday.’ The risk of
‘gloomsday,’ let alone doomsday, is slim.”
About half of the
people in China live in cities and towns, according to a census in April, up
from 36.1 percent in 2000, although the previous census used a different
counting method. If that trend continues, over the next 10 years about 200
million Chinese from rural areas will need new housing, workplaces and
household goods in urban areas.
“The massive amounts
of infrastructure just to keep up with population growth even as it slows will
mean any dip will be well supported,” said Jonathan Barratt, managing director
of Commodity Broking Services in Sydney.
Nick Trevethan is a Reuters correspondent.