Resource World Magazine

62 www.resourceworld.com a u g u s t / s e p t e m b e r 2 0 1 5 e p i l o g u e D a v i d D u v a l C hina has become an economic power- house and will likely remain the single most important driver of commodity prices for generations. That really shouldn't come as any surprise given the fact China is the world's biggest car market, an industry that consumes vast amounts of steel, zinc, copper, aluminum and other metal alloys. The number of vehicles sold in China last year climbed 6.9% to 23 million ver- sus a 13.9% growth rate in 2013 when sales were just shy of 22 million vehicles, according to the China Association of Automobile Manufacturers. The Wall St. Journal recently reported that "China's domestic car makers helped power a 9% rise in first-quarter passenger-vehicle sales, showing new strength on the back of booming demand for Chinese sport-util- ity vehicles despite a softening economy." In addition to being the world's fast- est growing economy, China is not only a global hub for manufacturing, it is also the largest manufacturing economy in the world as well as the largest exporter of goods. China also ranks as the world's fast- est growing consumer market and second largest importer of commercial goods. The sheer scale of Chinese industrial expansion has been mind boggling, with an average growth rate of 10% annually over the past three decades. Entire cit- ies have sprouted up where none existed before, the result of a debt-fueled con- struction boom. In most cases, the infrastructure around major cities in China is world class, position- ing the country to compete long term with major industrial powers like the US whose infrastructure has fallen into disrepair. The recent construction downturn in China, which has sharply depressed the price of major commodities, especially iron ore, probably won't end any time soon. As a result, the Chinese government is attempting to wean its dependence on credit-fueled investment and government spending, moving instead to a consumer- driven growth model. At a global economic forum last September, Premier Li Keqiang said that China "will continue to increase household consumption and make sure that greater internal demand could serve as a new power to drive economic growth." Indeed, recent monetary easing by the Chinese government appears to be an integral part of achieving increased internal demand for domestically manufactured products. The recent price drop in oil and other commodities has probably benefited China the most of any industrialized nation. In fact, the sharply lower cost of key indus- trial commodities such as oil, coal and natural gas has allowed the country to build its strategic energy reserves at a much lower cost. China's shift to a consumer-driven, growth model invites the question "what effect will the policy have on commodity prices?" Since 2011, iron ore prices have dropped by 70%, with major producers flooding the market with new production. Yet the sharp pullback from what were historically and arguably anomalously high iron ore prices makes the market look worse than it actually is according to Raymond Goldie, Salman Partners Vice President, Commodities Economics. Goldie notes that even at their lowest point in April 2015 "prices were still higher than they had been at any time before 2008." The flood of new production has helped flush out high cost producers in China and elsewhere which has served to stabilize iron ore prices and move them marginally higher in recent months. This is not only a good sign for iron ore prices longer term but also for metals that are used in steel manufacturing including nickel, zinc, chromium, tungsten, cobalt and others. In fact, a government of Australia study concludes that iron ore prices will begin to climb higher in 2016, reaching over US $80 per tonne by 2020. Copper finds itself in a remarkably similar price-demand pattern, according to Goldie. "Early this year copper prices dropped hard and fast. They went from about US $3.00/lb to, briefly, under US $2.50/lb in late January. Even so, in a situ- ation similar to that in iron ore, this was a price higher than anything that the copper market had seen before 2006." Regulatory constraints imposed on new mine developments in the western world will serve to delay new copper production coming into the marketplace, Goldie pre- dicts. In Canada, the US and Australia, it takes around 13 years to get a copper proj- ect into production – and that's a lot faster than in China and Eastern Europe where it's over 20 years. Also, mineral resources are finite – meaning that older mines will continue to struggle to maintain output in the face of higher costs and lower grades. For long suffering shareholders in min- ing stocks, Goldie believes the rebound in non-precious metals equities that began in April of this year could be a signal of better times ahead, noting "that the price of iron ore and the price of copper in this cycle bottomed out at levels that were higher than in any previous cycles." For most people, it can't come soon enough. n China's metal needs transitioning from infrastructure to consumers

• Cover