REUTERS-SUMMIT-Miners keep a close eye on China

NEW YORK, March 23 Fri Mar 23, 2012 5:07pm EDT

NEW YORK, March 23 (Reuters) - A warning this week from BHP Billiton that iron ore demand from China is flattening spooked metal markets, raising fears the world's largest consumer of basic raw materials could be heading for a downturn after years of stellar growth.

That fear, plus rising costs and volatile markets, will top the agenda at the Reuters Global Metals and Mining summit next week when executives from some of the world's largest miners and metal producers, including Rio Tinto Mining Ltd, Vale SA, Posco, Norilsk Nickel UL> and RUSAL will join Reuters in London, New York, Moscow, Seoul, Rio de Janeiro and elsewhere to discuss the state of the industry.

China's ravenous appetite for steel, copper and other metals has driven up global demand for raw materials for years, triggering a boom in mining from Australia to Chile and Brazil. But fears its red hot economy may be cooling could dampen investor enthusiasm for companies struggling to control rising production costs.

Australia-based BHP, the world's third-largest iron ore and copper miner, is one of the first to sense any shift in demand from the Far East. So when the company, with a $117 billion market capitalization, warns of faltering Chinese demand, investors sit up and listen.

"Chinese economic growth seems now to be the market's most serious concern, and the market is paying a good deal of attention to (BHP's comments)," said Dennis Gartman, editor and publisher of The Gartman Letter, a newsletter covering financial and commodity markets.

Ian Ashby, president of BHP's iron ore division, forecast in a speech this week that China's demand for iron ore, a key steelmaking ingredient, will slow to single-digit growth.

After almost a decade of high single-digit economic growth from China, this was a blow to the market which had bet the supercycle would continue for years to come.

The outlook sent copper prices lower as investors feared an end to the demand that has propelled base metal and bulk commodity prices to record highs in the last few years.

But the dip proved temporary, with copper remaining firmly above $8,200 per tonne, double the breakeven level for miners, and iron ore with 62 percent iron content holding near four-month highs of $145 per tonne.

For now the market prefers to bet on a soft landing for the world's second-largest economy.

And miners appear to agree. Ashby forecast China's steel output would soar 60 percent by 2025 and BHP and Rio Tinto both said they would push ahead with multi-billion dollar plans to expand iron ore output.

But data this week out of China - which buys 40 percent of the world's copper - has been less than encouraging.

Manufacturing shrank for a fifth straight month in March, according to data released on Thursday, while Beijing cut its 2012 growth target earlier this month to an eight-year low of 7.5 percent.

Slower growth in China is unlikely to have an immediate impact on the tentative recovery in the United States, with sales from metal-intensive industries such as cars and commercial aircraft proving robust.

Ominous signs emerged on the horizon though when three U.S. steelmakers warned earlier in March of weaker first-quarter results due to slower shipments.

Weakness in Asia will only compound an already-shaky outlook for the developed economies of Europe and the United States. That forces mining companies into a tricky balancing act, as they continue to ramp up output, risking oversupply that sends prices crashing, leaving them with an inventory overhang.

"They don't want to be caught short of capacity. Then again, I don't think they want to ramp up production to where they'll be caught with too much inventory," said Vishnu Varathan, market economist at Mizuho Corporate Bank in Singapore.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.