CHINA ‘NEEDS TO CUT OUTPUT OF MINERALS’

INCREASED Chinese mineral production is just as much a cause for the slide in prices as the aggressive expansions by western mining companies, says Investec’s global mining strategist Jeremy Wrathall.

The difference in this dramatic downswing in global mineral prices compared to other troughs in the cycle was the enormous amount of debt firms took on to build new mines and processing capacity after the 2008 global financial crisis and the rise of China as a producer, he said.

“We didn’t have China before and we didn’t have China massively ramping up their capacity. Yes, that capacity was needed when they were industrialising. Now it’s not,” Mr Wrathall said on Friday.

“It’s not just a western mining problem. What makes it very scary is we don’t know what will happen,” he said.

In a 13-year period from 2000, China grew its coal production 2.5 times to 3.5-billion tonnes, cementing its number one spot as the biggest producer.

China’s iron ore increased by a similar amount, to 269-million tonnes, manganese output nearly tripled to 14-million tonnes and copper output grew nearly threefold to 1.7-million tonnes.

China’s economy has begun to slow and economists suspect the cooling may be quicker than the authorities are letting on. As growth comes off the boil, domestic demand for minerals has decreased and there are fears this could be exported into an already weak global commodity market.

“China needs to pull back on production in a really big way. You can see for a range of commodities they have the biggest market share,” Mr Wrathall said.

Making valuations on mining companies in the prevailing market had to wait until the latest round of impairments, dividend cuts and rating agencies’ downgrades was complete and commodity prices once again stabilised. All eyes are on mining firms like BHP Billiton, Rio Tinto, Glencore, Vale and Anglo American, all of which are exposed to China and the commodities it voraciously consumed in the past decade.

Anglo reports annual results tomorrow and the market expects clarity on the deep restructuring CEO Mark Cutifani announced in December. There is speculation that X2 Resources will buy phosphate and niobium assets Anglo has put up for sale in Brazil.

BY ALLAN SECCOMBE