Suppliers who believe in the wisdom of the market have already started pumping money into marketing and promotion. Purchasing agents may not have flung their doors wide open yet, but market signals are saying it’s time to start jockeying for position.
So what is on the shopping lists in Australia? Over a third planned to buy safety equipment, but only 3.3 per cent were planning to buy shotcrete and shoring. Instrumentation and process control were on 11.5 per cent of lists, but drilling and blasting equipment were on only 4.8 per cent. Maintenance was high and bulk material handling low. Overall, the picture suggests an industry that is not running hard, but is getting tuned up to meet future demand.
The signals are not completely clear, of course. One quarter of the Australian respondents said that contract mining and other services would suffer in the short term.
The Australians may be guessing about future metal demand, but the biggest buyers are sending pretty strong signals. Chinalco is offering $19.5 billion for a bigger share of Australian miner Rio Tinto. China Minmetals is buying most of OZ Minerals’ assets, while China Sci-Tech Holdings Limited is taking OZ’s Martabe gold and silver project. Hunan Valin Iron and Steel Group is to buy up to 17.55 per cent of the Australian iron ore miner Fortescue. All these plays coming at the same time tells us that the Chinese expect production to go way up and prices to rise.
In Canada, almost 10 per cent of HudBay shares have been quietly picked up by a company controlled by India’s largest base metals mining company. Fifty-one per cent of Liberty Mines went to China’s Jilin Jien Nickel. Jien is one of China’s largest producers of nickel, copper and cobalt and needs to secure its supplies, especially as it moves aggressively into battery technologies. China intends be the leader in electric vehicles before long and Jien is targeting the battery market. Jien also has a joint venture with Canadian exploration company Goldbrook to acquire more properties in Quebec’s Raglan District. Goldbrook has almost 50 per cent of the productive geology within the Raglan Belt, and Jien will buy all the nickel-copper-PGE ore Goldbrook can ship.
Acquisitions like these are driving metal shares even though metal prices are still lackadaisical. Normally, share prices are a key leading indicator. Future demand doesn’t always show up as acquisitions. The special feature of today’s market is the huge U.S. dollar reserves in Asia. The best use for these reserves is to buy North American assets. The question is why minerals? Why not real estate or gold, or even auto plants? When Chinese companies, including state-owned companies, buy mineral assets, they are telegraphing the movement of their own economy.
China has also been stockpiling copper, imports of which were up 20 per cent from the same period last year for the first two months of 2009. How long will China continue to stockpile copper? It is impossible to say, but the planned purchases represent just 0.16 per cent of China’s U.S. dollar holdings. Spending U.S. dollars is a good idea and the Government of China is trying to do just that. With copper at a four year low, the reserves are a better store of wealth than low-yield U.S. T-bills, especially if you have inside information about future Chinese demand. The signal here is very positive as well.
What does it mean for suppliers? Slow times in the short run perhaps, but another boom coming before long. And if that is true, a lesson from the Great Depression comes to mind. Kellogg’s and Post were neck and neck in cereal sales as the depression started. Post slashed their advertising while Kellogg’s maintained theirs. At the end of the depression, Kellogg’s had captured a market position that they have maintained to this day.
Companies that were aggressive in promoting themselves and their products came out of the depression with bigger market shares. The cautious players lost ground.
