PDAC2012: China's Economy Should See 'Soft-Landing'; Supportive For Base Metals – Scotiabank

Debbie Carlson

05 March 2012, 11:32 a.m.
By Debbie Carlson,
Global news editor, Kitco News

Toronto (Kitco News)--China's government should be able to engineer a "soft-landing" for its economy and that should support base metals prices as the country looks to make its economic growth more sustainable, an economist at a leading Canadian bank said Monday.

China's gross domestic product is forecast to rise 8.6% in 2012 and 8.9% in 2013, compared to 9.2% in 2010, said Patricia Mohr, vice president and commodity market specialist at Scotiabank. She said Scotiabank has a large presence in China.

Chinese Premier Wen Jiabao on Monday pared the nation's economic growth target to 7.5% from the 8% in place since 2005, according to BLOOMBERG News. BLOOMBERG said that was a signal that leaders are determined to cut reliance on exports and capital spending in favor of consumption.

Mohr spoke at the PDAC2012 Prospectors & Developers Association of Canada's annual convention, which runs through Wednesday in Toronto.

China represents 42% of global demand for the four main base metals: copper, zinc, nickel and aluminum, so its decisions regarding how to direct its state-run economy are paramount to the outlook for these commodities, she said.

There are three reasons why China should be able to cool its economy without damaging its growth prospects, she said.

One, China is planning to expand its social housing program. The private sector housing market was behind much of the building development in China, but that market has fallen sharply. China's plan to build more housing for lower-income citizens will offset the decline in private sector housing.

Second, a top Chinese banking regulator said recently that municipal governments, which have seen mounting debts, can roll over bank loans as long as projects are 60% complete. She said when that announcement came out, copper prices rose sharply, which underscores the importance the Asian nation has to the red metal.

Third, China's National Development Reform Commission said government-led infrastructure projects will rise 15%-20% in 2012, which is a substantial gain over last year, she added.

A slower growth rate is becoming more acceptable in China as the labor market there tightens, she said. China began to shift from an industrial-led society to a consumer-led society in 2007 and this continues.

"The mining industry needs to be aware of these details," she said.


The recent trend of rising auto sales will continue and that bodes well for copper and aluminum, she said. Motor vehicle assemblies are back to levels experienced prior to the economic downturn in 2007, although still under the peak of 2005-06. Further, consumers will start to replace its aging fleet and switch to more fuel-efficient cars.

She also said the mining industry needs to watch two important trends – governments seeking more revenue from resources and inflation.

As commodity prices rebound, governments are seeking ways to benefit and will seek revenue from these resources. Some may come in the form of higher taxes and some may come from demands to upgrade resources. She pointed to Indonesia's recent call begin to ban exports of raw ore as one example of this trend.

Second, mining firms need to watch for rising inflation. Last year capital expenditure spending was up 28% in the mining industry. While this is lower than it was prior to the recession, firms need to be on guard for rising costs. Part of what keeps this from rising further is the general sense of economic uncertainty, she said.

Crude oil prices should remain elevated this year, around $110-$115 a barrel. She attributes the strength in oil prices to the tensions between Iran, Israel and western nations.

Copper prices should also outperform the rest of the base metals complex because of the tight supply situation. She sees copper prices averaging $3.90 a pound in 2012 and $3.80 a pound in 2013.

Prices could "come off the boil" a bit in 2013 as much-needed new mine supply growth comes on stream.

There is a hidden story in the base metals complex, she said, and that's zinc. "Copper may begin to lose its luster mid-decade, with the real strength shifting to zinc. There will be substantial mine depletion by 2014-15," she said.

Prices could "easily" rise to $1.45 a pound by that timeframe, from around $1 in 2011, she said.

Editor’s Note: Click Here For More PDAC 2012 Coverage.

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