SINGAPORE Global miners and smelters enjoyed a huge recovery in 2010 and early 2011 following the financial crisis, with base metals, iron ore and gold surging to record highs on a heady mix of cheap central bank finance, government stimulus and a laggardly supply response to improved demand prospects.
New headwinds for the sector however now include China's moves to cool its economy and the uncertain impact and pace of an expected plan by Japan to rebuild after the devastating earthquake and tsunami.
"After the Kobe earthquake, rebuilding efforts started two months after the event, but there is uncertainty about when the process will start in this case. However, once it does start, reconstruction will lift demand as it's metal and energy intensive work," said Barclays Capital Yingxi Yu.
"Chinese growth has been a major cause of concern. The expected restocking hasn't happened yet -- maybe the higher prices dampened that, but we have seen Chinese buying on dips, so the downside is probably limited."
At the same time mining firms including BHP Billiton (BHP.AX) BHP.L>, Rio Tinto (RIO.AX)(RIO.L), Brazil's Vale (VALE5.SA), Swiss-based Xstrata XTA.L and Barrick Gold Corp (ABX.TO) face rising costs from a shortage of skilled labor, surging oil prices and new tax burdens as governments look to prop up their treasuries.
Countries such as India have also tried to cash in on Chinese hunger for raw materials, and preserve resources for their own steel mills, with a series of taxes on exports of iron ore. Chile, Brazil and South Africa also rank amongst nations looking to increase tax revenue from miners.
The annual Reuters Global Mining and Steel Summit begins next week to draw out the views from many of the industry's leading players on how the markets and companies will fare over the rest of the year.
A key question will be what will happen to metal demand in the wake of the 9.0 magnitude earthquake off Honshu island.
How quickly can the battered nation, still trying to cope with crippled nuclear reactors and radiation leaks, start to rebuild?
PRICE RALLY STALLS
At the same time, analysts doubt miners will see a continuation of the rally in prices that has seen copper rally from just above $3,000 in the depths of the recession in 2009, to $10,190 and gold surge to a record above $1,440 from around $680 at the time of the Lehman Brothers' collapse in October 2008.
"Commodity producers 'have never had it so good' and are basking in the warm glow of bonanza prices beyond the dreams of avarice. Handsome operating profit margins bring into focus the next stage of the cycle - the supply response," said RBS head of commodity research Nick Moore.
"Producers have now laid out their plans to sweat their assets, push organic growth, maximize output and pump up the volume."
(Reporting by Nick Trevethan; Editing by Ed Lane)