china's ore lust is long term not near term

Article from mineweb

China is making moves to secure long term supplies and current markets provide a scenario in which this can be done at bargain prices says analyst and commentator Keith Goode. And, as almost alway with China, all may not be as it seems on surface.

Author: Ross Louthean
Posted: Wednesday , 04 Feb 2009

PERTH -

One of Australia's best known analysts and share market commentators, Keith Goode, of Sydney-based Eagle Advisory Service (ERA), reckons China is clearly on a quest now to control orebodies outside of China to achieve a goal not focused now on three years ahead but for the next 20 to 40 years. This, he said, was being achieved either by funding companies or controlling them - acquisitions in today's dire climate being achieved at bargain prices. Goode makes a sweeping assessment of the changing times in China and the impact this is having on global commodity prices and Australian miners and mine developers in particular.

It was made available today to Mineweb at the same time that shareholders of Gindalbie Metals Ltd (ASX: GBG) in Perth agreed to a $A162 million placement with Chinese partner Ansham Iron & Steel Group to keep its Karara magnetite-iron ore project in Western Australia's mid north on track. Ansham's equity in Gindalbie lifts from 12.6% to 36.28%. Outside the meeting several shareholders said Gindalbie had no other option given that normal equity raising and resource financing has virtually dried up.

Goode said ERA has seen several positive releases relating to China along the lines of metal restocking immediately ahead of Chinese New Year, rising spot iron ore prices (almost doubled from the $US40/t lows of early November to about $US75-80/t). Jinchuan forecast an increase to 125,000 tonnes of nickel production (from 110,000t) in 2009.

"But virtually none of that appears to have been reported in the Australian press," he said.

Like other observers ERA was "possibly too optimistic" with scenario expectation of the early stages of a commodity market recovery occurring in March or April this year. However, it is still very early in 2009 to push that recovery expectation out to 2010, especially as China has not really started yet.

Goode cited salient points he noted at the China Mining Conference in Beijing last November, including the deep resentment China had about being held to "ransom" by the likes of BHP Billiton and Rio Tinto with iron ore prices that were seen as seeking excessive profits.

On metal demand ERA saw the following:

•· Aluminium: Lower consumption in 2009, but China needs overseas resources to achieve the required targets. The required bauxite grades are available in India, Laos and Australia, while 2007 figures showed the biggest imports, 230 million tonnes, came from Indonesia.

•· Iron ore: Expected imports should flatten out in 2009-2010 to about 2008's figure of 435 Mt. The current Chinese iron ore grades average ~28%Fe, and are falling at about 1% pa (cut-off is at about 20%Fe and some marginal mines may close). Prices may fall 20-25% 2009, while imports may start increasing again from 2011, to possibly 50-60% of requirements by the end of the 5-year period to 2016.

•· Copper: Domestic production should be 900,000t in 2009 and 1 Mt in 2010. Copper imports in 2008 were estimated at 4.5 Mt. So China will need foreign counterparts to meet demand.

•· Nickel: Apart from Jinchuan, and some minor production, demand has to be met by imports.

•· Lead and Zinc: Automotive industry demand is expected to lift by 15% in 2009 to 13.8 M vehicles (which is slower after the 20% in 2008 and 25% pa in the two years before then). There is increasing demand for producing electric cars and motorised bikes which need battery power storage.

•· Gold: China is consuming more than it can produce.

•· Platinum group metals: Older vehicles are being phased out and there is an increasing move to new vehicles for autocatalysts.

Goode said many theories have been produced recently on what is going in with China's commodity markets.

He said ERA believes China deliberately started slowing down its commodity consumption about five months ahead of the Olympics, by closing down smelters to prevent any impact on power outage at the Olympics.

Any smelters that closed had to conform to higher emission standards before they could re-open, which meant that it has taken longer, some of the smaller ones have been unable to re-open, and consolidation is occurring.

"China recognizes that to be competitive it has to consolidate its smelting industry. Individual smelters in China reputedly number more than 1,000."

Shougang -- reputedly China's largest steel producer - said it had 575 mines-plants operating on an average grades between 30-35% Fe that feed into numerous smelters. These needed consolidation.

Goode said factory closures are not necessarily all due to the financial crisis. Factory closures were already occurring in November 2007, as foreign companies began to move factories to India and Vietnam due to rising wages.

Increased pressure occurred in 2008 due to rising material costs, higher wages and the fact that the remnimbi currency begcame possibly the world's strongest currency having risen by 20% against the $US in the past three years -- during which time, the $A fell from 7 to 4 Rmb.