The Hindu Business Line : China seen continuing to be key driver of commodities outlook

Perth, May 26 The outlook for commodities remains robust in the short-term, with China continuing to be the key driver, a mining conference was told here. With India being the most obvious country to follow China in economic progress, prospects look bright for metals.

“Income continues to rise in China. Its per capita consumption of key metals such as steel is lower than five kg. In fact, it is lower than in countries such as Japan, Korea and the US. This gives rise to the optimism that the mining sector will continue to do well,” said Ms Jane Melanie, Manager, Energy and Minerals Resources of Abare (Australia Bureau of Agricultural and Research Economics). She was addressing the 2008 AMEC Mining Conference on “Commodities Outlook for the Australian Resources Sector” during the weekend.

India’s demographic profile is following the same pattern as that of China and by 2030, it is likely to have more people of working age. “Therein lies the potential for economic growth and higher income in India,” she said.

challenges

However, significant challenges for India would be lack of infrastructure growth and proper regulatory structure. “Indian regulatory structure is not an ideal one. Its energy pricing is an example of this,” Ms Melanie said.

“India will have to undertake reforms before we can see significant growth. But the reality is Indian economy is structurally different from that of China. It seems to focus more on services rather than on manufacturing,” she said.

Stating that emerging economies were active in the global commodities trade, she said China, India, Brazil and Russia were making increased investment in foreign assets. “China is buying copper mines in South America and it is making use of sovereign wealth funds. On the other hand, the top global mineral companies are consolidating the market share continuously,” Ms Melanie said.

input constraints

The top four mineral resources firms including BHP Billiton and Rio Tinto, had increased their market share from 24 per cent of the total turnover in 1990 to 40 per cent currently. However, of late input constraints were emerging and production was curbed by energy, labour availability, equipment and infrastructure. “In the first quarter this year, energy availability was disrupted.

“Weather in Brazil, coal shortage in South Africa and infrastructure curbing coal supply in Australia besides snow storm in China hitting exports curbed production. On the other hand, the delivery time for key items of equipment has doubled. For example, tyres for the mining sector now take two years to deliver from the earlier three months. It takes two and a half years to deliver a locomotive, up from the earlier one year,” Ms Melanie said.

These have led to companies facing rising costs, besides ocean freight rates rising 30 per cent within a year. “Cash costs have increased by 70 per cent for gold production in Australia, South Africa, Canada and the US,” she said.

As a result, new global mining exploration expenditure was declining, while it also led to rise in brown field exploration.

On global economic growth, she said China, Asia and developing nations would witness strong growth compared with weaker growth in developed nations.

Key role

Australia would continue to play a key role in global supply of mineral resources such as coal and iron ore. Expansion of supply could lead to easing of prices, which are expected to peak during 2009-10.

Capital expenditure on mines was expected to increase 15 per cent to $23 billion during 2008-09, while it was set to rise rapidly further.

Dr Neil Williams, CEO of Geoscience, Australia, in his address, said mineral exploration expenditure was at all-time high.

“There has been record mineral exploration in the last six years since 1975. There has been an upswing in brownfield exploration, while in the last 20 years greenfield exploration has witnessed a decline. Though, new explorations increased in 2007,” he said.

“High gold prices have led to exploration boom. However, its resurgence could be at the cost of other commodities,” Dr Williams said.