Issue link: http://resourceworld.uberflip.com/i/581931
o c t o b e r / n o v e m b e r 2 0 1 5 www.resourceworld.com 23 a s summer 2015 progressed it became increasingly apparent that perhaps the most consistent and dramatic influence on worldwide markets – both financial and commodity metals – has shifted directly toward the giant nation of China. Morning after morning, European and North Americans markets are being directly influenced by what has taken place in China during the previous night. Given that our primary focus is on metals mining, there can be little doubt that dur- ing the past several years, the primary force behind metals prices has been that impor- tant nation; formerly to the positive but more recently to the negative. During the early years of this cen- tury, China's rapid economic expansion resulted in major additional increments of demand for a huge array of items, specifi- cally including such metals as copper, gold, silver, molybdenum, zinc, lead, etc. As this demand came to be regarded as being almost perpetual in nature, it resulted in rapid expansion of all manner of mining activity from exploration, development, construction of production facilities and, ultimately to steadily increasing metals production. However, as we have progressed through the present decade, serious questions have arisen regarding the sustainability of China's economic expansion and more recent data strongly suggests that a serious retrench- ment may indeed be taking place. As prospects for future growth in China have diminished, so have expectations on future demand for metals and, for the most part, their prices have gone into steep decline. There are several important points to make regarding the entire question of Chinese prosperity – past and future. First, a consensus had developed that because China was in effect a dictatorship of the Communist Party, the resultant total control over the economy would result in unusually high rates of industrial efficiency. That presumption now appears to have been shattered as numerous weaknesses in their economic structure have clearly emerged. Second, whatever faith had developed in the quality, integrity and honesty of data released by the Chinese government has now become open to question. Recent quotes from prestigious sources now directly question the veracity of Chinese information. Some of these include The Economist magazine which offered a recent headline, "Whether to Believe China's GDP Figures" while the Heritage Foundation simply declared, "…the Chinese Communist Party controls and manipulates the informa- tion it releases" and the British Broadcasting Corporation (BBC) chimed in with,"… But how much faith can be placed in the accuracy of GDP figures supplied by China when even the current premier, Li Keqiang has doubted their validity in the past?" Third, even with this uncertainty regard- ing Chinese information, there appears to be little doubt that their era of remarkable expansion is slowing down dramatically or even moving into actual recession. In late August, China stunned the world by delib- erately devaluing their currency, the Yuan, with the proffered reason being to stimulate China's manufacturing industries. In addi- tion, China just reported a decline in auto sales for the first time in two years and a private survey of manufacturing in China showed it shrinking at the fastest pace in six years. Major corporations have openly declared that their previous optimism regarding China now appears unjustified. Cummins, Inc. just announced that demand for their excavators has declined by 34% during the second quarter 2015. Weyerhauser noted a slowdown in Chinese construction has resulted in falling demand for its lum- ber products. Computer giant, Apple Inc., stunned financial markets in late summer by reporting disappointing earnings about which Business Insider says, "…China's economy is not only slowing, but slowing more dramatically than markets expect." From our point of view, if China's econ- omy is in fact in retrenchment or even outright reversal, there are three important considerations for our metals markets. Most obviously, if China's industrial demand is in decline, the impact on all the metals noted above must be regarded as negative, and, given the already relatively low prices for those metals, further decline could easily have a deeply negative impact on junior miners' exploration and development planning. Next, if China must stimulate economic activity, one means of accomplishing this might be to begin selling foreign curren- cies which it presently holds in abundance with the US dollar holdings being the most prominent. Should China begin to dishoard its American government bonds, that action would put downward pres- sure on those bond quotes, resulting in higher interest rates with negative impli- cation for American and world economic performance. However, and positive from the point of view of the precious metals in particular, China's uncertain future might easily result in falling worldwide securities market and, historically, negative stock market perfor- mance has frequently led to positive metals' market action. The eyes of the world's eco- nomic media are now focused foursquare on China – and the metals markets had better be paying close attention. n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relat- ing to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@shaw.ca s p e c u l a t i o n s L e o n a r d M e l m a n Chinese implications down the road