The Rising Influence of Rising Affluence

[DewDiligence]

JOY’s own PR re bullish outlook for iron ore and coal:

http://finance.yahoo.com/news/Joy-Global-Inc-Announces-bw-703708122.html?x=0

Spot prices for coal, copper and iron ore are down from their highs earlier this year by as much as 20 percent. However, these numbers need interpretation. First, de-stocking has reduced commodity imports below end-use demand, and set the stage for subsequent re-stocking. China’s imports of both copper and coal were reduced earlier this year as stock levels were reduced by rising prices and tightening credit. India’s imports of seaborne coal have been similarly reduced, and this has lowered stock levels at power generating plants to the lowest levels in three years. Steel production in China is down over 15 percent since the summer as trader inventories were forced down by tight credit policies. With better pricing and more constructive credit policies, commodity demand is expected to see improvement from restocking.

Secondly, reduced prices will have a greater effect on the higher marginal cost producers. It is estimated that 15 percent of the combined volume of seaborne and China domestic iron ore has a production cost of $140 per metric tonne or higher. As iron ore spot prices dropped from their highs of $190 per dry metric tonne earlier this year to their lows of $117 in October, high cost producers from China and India were forced out of the market and prices have since stabilized at around $140. The result is a better market for the larger, better capitalized and more efficient mines.

Today’s industrial sector inventories remain at historically low levels in days of supply, and inventory reduction is not expected to be an additional drag on commodity demand.

The global mining industry currently operates with little available excess capacity. Although down from earlier peaks, current spot prices for coal, copper and iron ore are up by 50 to 75 percent over the past two years and provide sufficient returns to justify continued mine expansion by all but the highest cost producers. A positive longer term outlook combined with stronger balance sheets and substantial cash on hand allows mining companies to continue making strategic investment decisions despite near term uncertainty. Miners remain focused on deploying capital expenditures to generate organic growth throughout the cycle. As a result, a number of major mining companies have announced increased capital expenditure budgets for 2012, and they continue to receive Board approvals of major green field projects.

Although the China economy has been slowing, it continues to signal a soft landing. The growth in Gross Domestic Product was 9.1 percent in the third quarter, which is down only modestly from the 9.7 percent peak earlier this year. Inflation as measured by the Consumer Price Index was down to 4.2 percent in November from 5.5 percent in October. October saw the fastest growth in Chinese manufacturing output in six months, and there was further improvement in November. Coal imports reached a record level in September and are expected to remain strong for the balance of the year as stockpiles are rebuilt for the winter heating season. China copper consumption should be up 8 percent this year and could reach 7 million metric tonnes, driving imports to a 17-month high in October. And finally, China’s 12th Five Year Plan calls for $840 billion U.S. dollars to be spent on investments in power generation and the electricity grid, and this will add support to long-term commodity demand in China.