China has paused for breath — and knocked the wind out of the commodities boom. Rio Tinto Group, the Anglo-Australian mining firm, warned on Wednesday that the world’s biggest consumer of steel, coal, aluminium, copper and seaborne iron ore had started to show signs of a slowdown. Rio’s shares, and those of rival BHP Billiton Ltd, fell almost 10%, wiping about £10 billion (Rs84,200 crore) off their market values. So much for decoupling.
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Miners such as Rio and BHP are betting on China in a big way. The Middle Kingdom accounts for more than 40% of the global growth in demand for major commodities, by Deutsche Bank AG estimates.
Miners have dogmatically insisted that, on the long view, that trend is copper-bottomed. That has supported the case for long-term high prices for materials which China needs to fuel its rapid industrialization, such as iron ore.
But in the short and medium term — which most affect share prices — China’s dependence on exports to the US and Europe makes it vulnerable to a global slowdown. While that slowdown isn’t a shock, it now looks like it will be longer and more profound than even bearish commentators expected. That has already started to hit commodity prices. Iron ore is down 30% from its peak, and copper 20%. Chinese steel makers are now cutting prices.
The effect miners are seeing now may not yet fully reflect the global slowdown, either. Given the roughly six-month lag between economic stimuli and commodity prices, what Rio is seeing is most likely to be the effect of China’s own self-made credit crunch — the result of past attempts by the administration to dampen growth by tightening up credit. There may be further contagion in the post if exports slow in earnest.
The relaxing of China’s internal credit squeeze should balance much of that out. But estimates of Chinese growth of 9-10% for next year could prove optimistic. Arguably, given the likelihood of global recession, growth of 8%, or less, could be in store. Standard Chartered Bank expects 7.9% in 2009, slowing to 7.1% in 2010. In the long run, China’s growth will probably be fast enough to keep commodity prices up — but the journey may be longer and less profitable than commodities producers had hoped.