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.