Some miners nervous downturn may worsen

LONDON (Reuters) - Many miners are gearing up for a long, difficult downturn and some are worried that conditions could worsen before they improve.

They told Reuters Global Mining and Steel Summit in London, New York and Asia that they expected China to eventually regain its heavy appetite for metals, but the unsolved issue of toxic banking assets in the West could block any nascent recovery.

"I'm scared about the whole world," said Peter Hambro, executive chairman of the Russian gold producer (POG.L) that bears his name.

"I wish that I could be more positive. I think there are signs that things are getting better, but I don't see how they can become properly better until the banking system is in good shape." Coskun Ulusoy, chairman of Turkey's biggest steelmaker Erdemir (EREGL.IS) and head of parent conglomerate Oyak, also feared the global economic crisis was far from over.

Early on, Ulusoy had been wary about the health of the Western financial system, prompting him to sell Turkey's Oyak Bank to ING (ING.AS) for $2.7 billion in 2007.

"People, in my opinion, still haven't realized the enormity of this issue, how bad this situation is, and I think there is a lot of room to go."

It could take five years for steel demand to return to the heady days of 2007 and early 2008, he added.

Hyundai Steel (004020.KS), South Korea's second-biggest steel maker, was not as gloomy, but was still cautious.

"We've been badly hit by the current downturn, but demand is improving and inventory is also back to an appropriate level but it's too early to say if the market has bottomed out," said Kim Sang-gyu, senior vice president and management planning division director.

EQUITY VALUATIONS IMPROVE

Richard Horrocks-Taylor, who heads mining investment banking at the Royal Bank of Canada Capital Markets in London, said mining equity valuations had improved, but weak conditions might drag on for 18 months.

"Our view on the market ... really we are not going to see a sustained recovery on the commodities side until well into 2010, the second half of 2010," he told the summit.

"Back in November, groups were trading on about 60 percent to 70 percent discount to fundamental value. We've seen that gap reduced to, say, 30 percent to 40 percent; they're still at historic lows ... We see it pretty subdued now for the next couple of years."

Others, however, were more upbeat, pointing to stimulus packages in China and the United States.

"The China economic stimulus programme ... is an enormously encouraging phenomenon," Klaus Kleinfeld, chief executive of Alcoa Inc (AA.N), told the summit.

"China has ramped up or cranked out a stimulus programme of the size of the U.S. programme for an economy that is only 18 percent of the U.S."

China's programme by itself would not lift the world from its downturn, but there were other encouraging signs, he said.

"I have never seen in my lifetime that governments around the world were so aligned so fast on trying to be supportive on bringing the world economy back up."

Ian Christmas, the head of the Brussels-based World Steel Association, said a herd mentality was pushing many people to join in ever more despondent outlooks.

Just as most miners were too optimistic at the height of the commodities boom, buying the idea a "super-cycle" lifted by Chinese demand, now they were going too far in the opposite direction, he said.

"When I listen to these guys and they say it's terrible, it's going to take five years to get back to where we were in 2008 and I'm thinking, they're overdoing it," said Christmas, an economist by training.

"I would be very surprised indeed if there weren't real green shoots out there by the end of the year."

(Editing by Andrew Macdonald)

(For summit blog: blogs.reuters.com/summits/)