19-11-2015, 07:47 AM
Copper's future bright despite rout
DateNovember 19, 2015 - 8:26AM
[Image: 1444795415899.jpg]
Mark Mulligan
Senior markets and economy writer
Iron ore stocks might be out of favour at the moment, but investors should look at exposure to copper to capitalise on China's transition from heavy industry and exports to more consumer-driven growth, say a range of mining executives and portfolio investors.
They say while oversupply of iron ore to feed China's increasingly export-orientated steel mills is undermining the mineral's price, changes in the country's urbanisation program, coupled with development in India, should ultimately be good for copper producers.
"There's no question that now as we look at the Chinese economy, not everyone is rising on the same tide - we see it more on a sector base," Rio Tinto non-executive director Megan Clark said at the Bloomberg Summit in Sydney on Wednesday.
"The transition from manufacturing to the services, which has probably been a bit more bumpy than had been heralded by the government, is not the underpinning of infrastructure, which has been good for steel.
"But if you look at the long-term picture for copper, with urbanisation, the use of electricity - particularly renewable energy - you still see the demand growing there," she said.
Commodities rout
Her comments came on the day copper prices hit a six-year low and iron ore, too, dropped another 4.5 per cent to a fresh four-month low of $US45.58 a dry metric tonne.
The falls have as much to do with repricing because of the strength of the US dollar, but demand from China, by far the world's biggest consumer of raw materials is also a big factor.
BHP Billiton does not expect depressed copper prices to lift for at least the next three years, but is confident of a comeback around 2019, when the market should start to shift into a "total under-supply situation".
Resource stocks were by far the biggest losers on the Australian stock exchange on Wednesday, as jitters about the great Chinese transition continued to weigh on investor sentiment.
Few economists see a hard landing in China, but growth is cooling.
Sector investors and executives at the Bloomberg seminar remain bearish on iron ore because of the resulting oversupply.
Copper, however, was singled out as a good investment, despite current price softness.
"People can go to China and see what they want to see," said former mining sector leader at EY and global consultant Mike Elliot.
"If you're bearish you can go to the second or third-tier cities that have ghost buildings.
"If you're bullish, you'll go to second- and third-tier cities that are underdeveloped for what urbanisation is going on," he said.
"The answer is probably somewhere in the middle."
Wealth spreading
He said as wealth in China spread and the middle class expanded, families would outgrow their state-built one-bedroom units and demand bigger, privately-built accommodation.
These would contain more wiring and appliances with copper than typical accommodation today, he said.
"That doesn't mean to say you'll have the same rate of steel demand that you had in the past," he said, "but what you'll start to see is more copper demand."
The message chimes with comments this week by UBS's senior China economist Donna Kwok, who told the The Australian Financial Review that although growth in China was easing faster than expected, government stimulus to avoid a hard landing for the country involved urbanisation programs that would call on resource inputs.
The government was also committed to dealing with the country's huge property overhang, she said.
"In terms of policy levers China still has to pull, it is still going to be increasing infrastructure support and investment support," she said.
"Another lever that the government can also pull is property policy easing, which is much needed to digest excess inventory."
Kapstream Capital's chief investment officer Kumar Palghat agrees Chinese support for iron ore and other metals will not disappear.
"I find it hard to believe that China's modernisation is won and done," he said at the Bloomberg seminar.
"It's hard to believe that they're trying to move 200 million or 400 million people to the middle class in five or seven years, and that everything's finished.
"If you move around the country, you notice that infrastructure is changing - and this is happening in India as well, so it's still broadly positive," he said.
Despite this more upbeat sentiment, State Street Global Advisors' Asia-Pacific head of active quantitative equities Olivia Engel remains heavily underweight Australian mining stocks amid the commodities slump.
"If housing [in China] is stimulated, then that means underlying support for Australian resources companies," she said.
"With that in mind we have a small position in some major Australian miners in our portfolio - but it's only 3 per cent.
"So, we're dipping a toes in with resources, but we're not expecting them to be a major engine of growth for Australia," she said.
"Australia needs to find other ways of growing than getting more stuff out of the ground."
DateNovember 19, 2015 - 8:26AM
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[Image: 1444795415899.jpg]
Mark Mulligan
Senior markets and economy writer
[Image: 1447882000265.jpg]
China's transition isn't all bad news for resource stocks. Photo: Paul Jones
Iron ore stocks might be out of favour at the moment, but investors should look at exposure to copper to capitalise on China's transition from heavy industry and exports to more consumer-driven growth, say a range of mining executives and portfolio investors.
They say while oversupply of iron ore to feed China's increasingly export-orientated steel mills is undermining the mineral's price, changes in the country's urbanisation program, coupled with development in India, should ultimately be good for copper producers.
"There's no question that now as we look at the Chinese economy, not everyone is rising on the same tide - we see it more on a sector base," Rio Tinto non-executive director Megan Clark said at the Bloomberg Summit in Sydney on Wednesday.
"The transition from manufacturing to the services, which has probably been a bit more bumpy than had been heralded by the government, is not the underpinning of infrastructure, which has been good for steel.
"But if you look at the long-term picture for copper, with urbanisation, the use of electricity - particularly renewable energy - you still see the demand growing there," she said.
Commodities rout
Her comments came on the day copper prices hit a six-year low and iron ore, too, dropped another 4.5 per cent to a fresh four-month low of $US45.58 a dry metric tonne.
The falls have as much to do with repricing because of the strength of the US dollar, but demand from China, by far the world's biggest consumer of raw materials is also a big factor.
BHP Billiton does not expect depressed copper prices to lift for at least the next three years, but is confident of a comeback around 2019, when the market should start to shift into a "total under-supply situation".
Resource stocks were by far the biggest losers on the Australian stock exchange on Wednesday, as jitters about the great Chinese transition continued to weigh on investor sentiment.
Few economists see a hard landing in China, but growth is cooling.
Sector investors and executives at the Bloomberg seminar remain bearish on iron ore because of the resulting oversupply.
Copper, however, was singled out as a good investment, despite current price softness.
"People can go to China and see what they want to see," said former mining sector leader at EY and global consultant Mike Elliot.
"If you're bearish you can go to the second or third-tier cities that have ghost buildings.
"If you're bullish, you'll go to second- and third-tier cities that are underdeveloped for what urbanisation is going on," he said.
"The answer is probably somewhere in the middle."
Wealth spreading
He said as wealth in China spread and the middle class expanded, families would outgrow their state-built one-bedroom units and demand bigger, privately-built accommodation.
These would contain more wiring and appliances with copper than typical accommodation today, he said.
"That doesn't mean to say you'll have the same rate of steel demand that you had in the past," he said, "but what you'll start to see is more copper demand."
The message chimes with comments this week by UBS's senior China economist Donna Kwok, who told the The Australian Financial Review that although growth in China was easing faster than expected, government stimulus to avoid a hard landing for the country involved urbanisation programs that would call on resource inputs.
The government was also committed to dealing with the country's huge property overhang, she said.
"In terms of policy levers China still has to pull, it is still going to be increasing infrastructure support and investment support," she said.
"Another lever that the government can also pull is property policy easing, which is much needed to digest excess inventory."
Kapstream Capital's chief investment officer Kumar Palghat agrees Chinese support for iron ore and other metals will not disappear.
"I find it hard to believe that China's modernisation is won and done," he said at the Bloomberg seminar.
"It's hard to believe that they're trying to move 200 million or 400 million people to the middle class in five or seven years, and that everything's finished.
"If you move around the country, you notice that infrastructure is changing - and this is happening in India as well, so it's still broadly positive," he said.
Despite this more upbeat sentiment, State Street Global Advisors' Asia-Pacific head of active quantitative equities Olivia Engel remains heavily underweight Australian mining stocks amid the commodities slump.
"If housing [in China] is stimulated, then that means underlying support for Australian resources companies," she said.
"With that in mind we have a small position in some major Australian miners in our portfolio - but it's only 3 per cent.
"So, we're dipping a toes in with resources, but we're not expecting them to be a major engine of growth for Australia," she said.
"Australia needs to find other ways of growing than getting more stuff out of the ground."