Mining sector looks attractive
Feb 15 2010 by Fergus Westwood, The Journal
DURING the "noughties" the mining sector benefited greatly from the growth of emerging economies, which drove raw materials and metals prices to record levels.
However, the sector has been volatile over the last three years due to concerns over economic slowdown and takeover activity. Indeed we have just emerged from the worst recession since the 1930s.
The recession resulted in lower industrial output, which had a negative impact on commodity prices, and it is likely that industrial production will take some years to recover to 2007 levels.
Against this backdrop, we have seen commodity prices rebound strongly, which is perhaps surprising, given the depth of the recession and the lower value of global industry. Is there a reason for this?
In short, the answer is China. Before the economic downturn, China’s economy and its demand for metals was growing at an astounding rate.
The economy was growing at over 10%, 15 million people were moving to the country’s urban centres every year and massive investment in infrastructure was underway. An additional $586bn of policy stimulus has driven further demand for commodities.
Chinese construction is particularly metals-intensive as bricks are banned for environmental reasons, which means that most buildings are made out of concrete and steel. The amount of metals used per square foot is also rising as buildings become taller and greater strength is required.
The result of this has been that China’s share of world metals demand has grown from 5-10% in 2000 to around 30% in 2008 and leapt to approximately 40% in 2009.
It is likely that Chinese demand will ease off from the current level as and when stimulus spending winds down. Should the mature Western economies continue to recover, this may coincide with a winding down in Chinese demand.
Several of the UK’s mining companies have issued results this month, with Rio Tinto reporting full- year figures last Thursday that were stronger than analysts had expected. BHP Billiton, the Anglo Australian diversified miner, reported its figures for the first half of the year last Wednesday, which again were ahead of analysts’ forecasts.
Another of the FTSE 100 Index’s mining companies, Antofagasta, which is solely focused on copper mined from its Chilean operations, released production figures for the fourth quarter earlier this month. Again these were ahead of expectations and the company is also one the lowest cost producers in the sector.
Given the strength of demand for commodities, the mining sector may prove attractive to investors. However, individual circumstances should always be considered, as no investment is suitable for all circumstances and appropriate advice should be sought before undertaking any investments.
