Mining major sees signs of Beijing's stimulus working

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

27 Feb 2009

Major diversified miner Companhia Vale do Rio Doce (Vale) believes that China’s economic stimulus plan is beginning to have beneficial effects. In its report of its operational and financial performance for 2008, released last week, the Brazilian company – one of the world’s three biggest diversified mining groups – noted: “China, currently the most important market in the world for minerals and metals, is likely to have had zero growth at the margin in the last quarter of 2008, when companies responded to the drop in domestic and external demand with sharp production cuts.
“However, the announcement of a major fiscal programme focused on infrastructure spending and the surge in bank lending in response to a credit easing policy are stimulating capacity utilisation to bounce back.” Already, Vale says, the indications are that the steel destocking cycle in China is nearly finished, iron-ore stockpiles are being used up, with the result that steel and spot iron-ore prices are rising. The company points out that, in previous global downturns, China was able to maintain economic growth by means of countercyclical policies, because external demand formed only a small part of total demand, and because China is a net lender to the rest of the world.
Vale does caution that the cyclical downturn in the property market in China is still constraining recovery in steel demand. “Still, it is quite possible that growth in bank lending and the various incentives put in place by central and provincial governments will be able to engineer a cyclical change in the real estate market, thus strengthening further the demand for steel and iron-ore.”
In the ten years from 1998 to 2008, Chinese iron-ore imports increased by 8,6 times, from 51,8-million tons to 444-million tons, while the country’s steel production rose 4,4 times, from 114,6-million tons to 502-million tons. Thus, despite attempts to increase domestic iron-ore production, the country is increasingly dependent on imports. “The continuation of the trend is clearer,” asserts Vale, “if we observe that, in 2008, China’s crude steel production grew by only 2,6% whereas iron-ore imports expanded by 16,0%. As a consequence, even in a more moderate growth environment, Chinese demand will continue to pressure the supply of iron-ore in the seaborne market.
“Despite the rebound in freight prices – which used to be an indicator of economic recovery – our iron-ore products delivered in China remain competitive.”
China is, of course, a key market for much more than just iron-ore. Vale points out that aluminium, copper and nickel prices displayed great downward volatility in the second half of last year, as a result of all the bad news about the world’s financial markets, but that base metals prices have exhibited low volatility since December – the economic bad news has probably now been factored into their prices. “Therefore, we expect the short-term trend to be determined by the arrival of the new information about the global macroeconomic environment, in particular regarding the evolution of China’s economy.”
After reaching a trough in October, world nickel prices have been range bound between $10 000/t and $11 000/t, and the drop in global demand, plus the increasing stockpiles, constrain short-term price rises. While there are “good signs of improvement”, in Chinese stainless steel production, the majority of the country’s nickel pig iron producers have shut down their operations. Also, stainless steel production remains weak in the US, Europe and Japan, and nonstainless steel markets for nickel, which account for between 35% and 40% of global demand for the metal, are showing weakness, too.
Despite the sharp deceleration in the global economy last year, Vale still achieved a record gross revenue of $38,5-billion (up 16,3% on 2007’s figures), a record operational profit (as measured by adjusted earnings before interest and taxes – Ebit) of $15,7-billion (a 19% increase on 2007’s figures), an increased operational margin (as measured by an adjusted Ebit) of 41,9% (the 2007 figure was 40,9%), record net earnings of $13,,2-billion, and a record investment (excluding acquisitions) of $10,2-billion.
The company also set eight production records, for alumina, bauxite, coal, cobalt, copper, nickel, platinum-group metals and precious metals.

Source: Mining Weekly