The MasterBlog: Analysis: Big miners make brave bet on record commods boom | Reuters
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Sunday, February 20, 2011

Analysis: Big miners make brave bet on record commods boom | Reuters

Analysis: Big miners make brave bet on record commods boom

(Reuters) - Any investors willing to bet that the commodities boom is running out of steam may need both courage and patience: major miners have wagered more than $110 billion on the opposite view.
BHP Billiton (BHP.AX), Rio Tinto (RIO.AX) and Xstrata (XTA.L) have committed themselves in the last two weeks to spending vast sums on expanding production of iron ore, copper, coal and other raw materials over the next five years.
In decades past, that would signal the beginning of the end, the exuberance that leads to oversupply and tumbling prices, but this time the miners say it's different -- and, for once, commodity markets are inclined to believe them.
"The growth fundamentals certainly support these big expansion projects," said John Robinson, chairman of investment vehicle Global Mining Investments (GMI.AX) whose funds are managed by BlackRock (BLK.N), the world's biggest asset manager.
The difference this time can be summed up in a word: China. Or maybe two: China, India.
UNPRECEDENTED
Industrialization and urbanization on the scale of China are unprecedented: in three decades, the proportion of its people living in cities has more than doubled to 45 percent, creating record demand for steel and its raw materials.
China boasts around 170 cities with more than one million residents, compared to Europe with about 35, and there are still 300 to 400 million people expected to move from the countryside to the city over the next 20 years, most of whom will live in the country's rapidly expanding forests of apartment blocks.
A typical 90-square-meter (970-square-foot) apartment in China needs six tonnes of steel and each tonne of steel requires 1.7 tonnes of iron ore. And every new building needs to be wired with copper and powered mostly by coal-fired electricity.
Add a fast-urbanizing India to the mix and it's not hard to see why billions are being spent to dig more iron ore, the primary ingredient in steel-making.
SOME DOUBTS
Outright pessimists are hard to find in commodities markets, but doubts are growing, especially over the near-term outlook, with traded iron ore prices and copper at record highs and steel-making coal prices up more than 30 percent in 12 months.
Some analysts say inflationary concerns and rising interest rates in China, coupled with forecasts for slowing growth in emerging markets overall, could take the polish off commodities.
"We have seen record highs...but you can clearly see that demand is cooling down a little on the current high prices," Commerzbank analyst Daniel Briesemann said.
Though iron ore and coal prices have yet to show signs of softening, copper is off its peaks, touching a three-week low on Thursday, and aluminum has seesawed as London Metals Exchange inventories near record highs.
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Analysis: Big miners make brave bet on record commods boom | Reuters

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