Shortfall of metals risks China's riseRobin Bromby, Commodities,...

Shortfall of metals risks China's rise
Robin Bromby, Commodities, The Australian
09jan06

HOLD tight, it's going to be another belter of a year for metals.

In fact, so critical is the supply situation, according to one local analyst, that China's growth could be compromised because it cannot get its hands on enough raw materials.

The starkness of the situation is illustrated by copper. While stocks of the red metal have been rising in recent weeks, the London Metal Exchange's holdings account for just two days' worth of world consumption.

Merrill Lynch's US operation sent a note to clients last week that copper, aluminium, nickel and steel would be in tight supply for 2006.

An official of the India Lead Zinc Development Association said last Friday that India would need to import more lead to supply its auto industry, which now produces more than a million cars a year.

India last year had to import lead, including from Australia, because its own mines could not meet rising demand.

But the latest alert has been sounded by Eagle Research analyst Keith Goode, who warned clients in a research note that they stood to lose money if they made the wrong call on China.

After returning from his latest China visit, he expressed amazement that some investors still did not believe in the "super cycle" or were waiting for commodity prices to start falling.

"This belief that commodity prices have to fall is the only rationale I can apply to relatively weak performance of Australian nickel producers such as Mincor or Sally Malay during 2005," Mr Goode said.

But Chinese demand was unlikely to fall. "The main potential restriction to China's growth appears to be insufficient raw materials in the world," he said.

Even with new mines coming into production, Mr Goode sees metal shortages increasing over the next few years.

He cites some places where these metals will be needed: another 110 civil airports in China over the next 10 years, $US42 billion ($55.7 billion) being invested to build 6000km of new railway lines and, by 2015, there will be 35,000km of tolled motorways.

China now consumes 48 per cent of the world's cement and 20 per cent of its copper.

Mr Goode said China would be in what has been termed growth phase 1 through to 2010, and then would enter phase two of even higher growth.

"The world is trying to cope with phase 1, let alone higher consumption demand from 2010."

He said Chinese companies would continue to search the world for new resources that they could control.

His comments came as China Minmetals Corp, the country's largest metals trading house, was about to conclude a 15-year contract with Chile's Codelco to buy 55,750 tonnes of copper a year.

Symptomatic of the investor demand for metals exposure is local junior Equinox Minerals last week closing a $170 million capital raising for its Zambian copper project.

Chief executive Craig Williams said that being able to raise that money, as well organising a $US355 million debt facility, would have been extremely difficult just two years ago.

"I think it would have been virtually impossible," he said.

The attraction for investors would have included the fact that few, if any, big new copper mines would come into production before Equinox got its output up and running by 2008.

China has also started mining copper in Zambia -- and is building its own smelter there. Equinox has been talking to that Chinese company, as well as African-based smelters, about selling its copper production.