China super cycle not ending, just shifting – by Malcolm Maiden (Sydney Morning Herald – July 20, 2013)

http://www.smh.com.au/

Orica was Friday’s high-profile casualty of the resources sector slowdown as its share price slumped in the wake of a profit downgrade, but the resources ”super cycle” isn’t dead. It’s just having a lie down, like a toddler that’s recovering from a sugar overdose.

The commodity price bubble that accompanied China’s infrastructure investment boom won’t be repeated. When China’s demand for commodities surged a decade ago, the miners had been closing down mines and cutting exploration and development for decades. Today China is growing more slowly and in a different way, and the supply pipeline is larger.

The trend that Goldman Sachs global research head Jim O’Neill highlighted in 2001 when he first predicted the rise of the BRICs – Brazil, Russia, India and China – is far from over, though. It’s difficult now to appreciate just how revolutionary was O’Neill’s prediction that emerging nations, and China in particular, would become powerhouses when it was made. He exposed a huge emerging market dynamic, one that dominated economic management in Australia as it played out.

With the benefit of hindsight, it seems O’Neill and Goldman underestimated China’s impact. China has consumed more steel in the past decade than it did in the previous 60 years, and its share of global iron ore consumption has risen from 20 per cent to 56 per cent. Its share of consumption of coal used for steel making has risen from 20 per cent to 57 per cent in a decade, its consumption of nickel is up from 9 per cent to 41 per cent, and its consumption of other commodities shows similarly stellar increases.

O’Neill’s BRIC hypothesis created two related and highly influential market mantras. The first was that the BRICs were seeding a resources ”super cycle” as they expanded – and as supply-side bottlenecks developed. The second was that the super cycle would be super not just in price, but in duration: commodity prices would be ”stronger for longer”.

Analysis by Goldman at the end of April showed that the spoils fell unevenly after the boom took off in 2003, and will fall unevenly again as the super cycle moves into its next phase.

The iron ore price is 500 per cent higher than it was in 2003, supercharging the profits of the big three iron ore miners, BHP Billiton, Rio Tinto and Brazil’s Vale. Over the same decade the aluminium price rose by only 47 per cent, though, as China expanded domestic production of the metal using captive power supplies.

Rio therefore robbed itself of some of the momentum it was getting in iron ore by paying $US38 billion for the Alcan aluminium group in 2007. The world’s biggest aluminium producer, Alcoa, has also struggled, and so have iron ore ”have nots” including Anglo American. BHP’s shares have risen 243 per cent in the past decade. Rio’s shares have risen 129 per cent. Anglo’s shares are up 28 per cent, and Alcoa’s shares have fallen 69 per cent.

The interplay between costs and selling prices has also been crucial. Labour and materials prices soared as the miners rushed to expand production, but they paid what it took to get new capacity online, and hoped that prices would rise even faster.

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