Miners uncertain on how to read Beijing demand
Top mining companies scramble to become more responsive on the supply side, writes David Stringer
RIO Tinto Group, the world’s second-biggest mining group, is no longer certain of picking the path ahead for growth in China, its biggest customer. It is not alone.
China’s short-term demand remained difficult to read, Glencore CEO Ivan Glasenberg said in August after the largest miners were wrong-footed in 2016 by Chinese stimulus that has boosted raw materials demand, lifting prices following five consecutive annual declines. Rio now sees longterm targets as unhelpful, and has drafted a range of potential growth scenarios, with titles including “china malaise” and “fits and starts”, according to CEO Jean-Sébastien Jacques.
“It’s not about predicting the future; it’s about preparing for any future — this is where mining and metals companies have gone wrong in the past,” EY’s global mining and metals sector leader Miguel Zweig says. “Growth in China, which is critical to pricing, is difficult to anticipate.”
The muddied outlook means Rio, which won about 42% of first-half revenue from China, has backed away from its forecast that the country’s steel output will rise until 2030 to peak at about 1-billion tonnes. BHP Billiton’s top economist said in September iron-ore exporters had been caught out by higher prices, while Glencore in August booked a $395m loss, after hedging future coal production before a rally amid a surge in Chinese imports.
Planning for varied outcomes for China’s growth would be a positive step from the miners, as were signs they were prepared to be more responsive on supply, says Tim Murray, managing partner with China-focused J Capital Research. Uncertainty over pricing means the producers should boost productivity and continue to review portfolios to focus on key commodities and regions, according to Sao Paulo-based Zweig.
Glencore was closely monitoring China’s commodities demand and also the country’s adjustments to coal production to make decisions on its own output, Glasenberg said in August. BHP’s marketing team, including staff on the ground in China, “have a mandate to challenge existing views”, Arnoud Balhuizen, the producer’s president of marketing and supply, said in September. “We want to consider a range of scenarios, as uncomfortable as they may be at times.”
Economic data for China released on Tuesday showed factory output, investment and retail sales had all exceeded estimates, while crude steel production had risen 3% in August from a year earlier. Though the indicators offer signs of resilience in China’s economy, a crucial question is how sustainable growth will be when policy support withdrawn, according Bloomberg Intelligence.
China’s willingness to step in to shore up growth is complicating the picture for observers of the country’s economy, according to Murray. “Every time you think they are really not going to stimulate now, and will focus on restructuring the economy, the is to economy starts falling fast and they return to stimulus,” he says. “It’s hard to anticipate the government’s response.”
Glencore’s Glasenberg said in 2015 that China continued to puzzle the industry. “None of us know what is going on there,” he said. Producers, including BHP, had been unprepared for China’s demand rush in the 2000s and then failed to forecast the scale and speed of a reversal in prices in recent years, BHP CEO Andrew Mackenzie said in March.
Along with others, BHP was “caught short” in 2016 as ironore supply has undershot amid improved China demand, according to Huw McKay, the producer’s vice-president of market analysis and economics. “We have been surprised by the price,” McKay said in September. “We’re not alone there.”
An uncertain outlook for prices and earnings meant producers would need to balance plans to invest in growth with efforts to strengthen balance sheets, says Zweig. “Companies are facing a difficult choice about how to allocate capital and create value.”