RBA believes worst is over for commodities

The Reserve Bank of Australia is optimistic that the mining decline has passed its worst point.

Amid close to record lows for the iron ore price and speculation of peak coal in China the RBA has reiterated its confidence in mining.

Speaking at a UBS conference yesterday, RBA assistant governor for economics Christopher Kent outlined the belief that bottom of the cycle has been reached, according to The West.

“One of the reasons why commodity prices now are much higher than they had been is because demand has expanded over many, many years," Kent said.

"So you'd need a really big retraction in demand to bring us back to those levels."

Kent went on to say while prices may retreat further, additional falls in demand are unlikely.

The market is currently mixed on the state of the industry, and whether the bottom of the downturn has been reached.

Speaking at the Stockbrokers Association of Australia Conference, China Metallurgical Industry Planning & Research Institute’s president Xinchuang Li told Australian Mining that the bottom was reached, and there would be a plateau ahead.

The economic slowdown in the country “is the new normal,” Li stated, and this will affect Australian iron ore miners as the nation shifts from its heavy industrial phase into a more services focused era.

“China is moving from its rapid growth development phase into a new phase,” he said.

Li gave a breakdown of the market, citing a number of major issues, predominately low production and consumption fluctuations; low profitability combined with a high level of market competition in steel production; and increased downwards pressures relating to both financial and environmental concerns.

He predicted a consistent fall in Chinese steel consumption, from a country that currently accounts for 60 per cent of global consumption, dropping to 689 million tonnes in 2020, 650 million tonnes in 2025, and 610 million tonnes in 2030, at odds with Rio Tinto’s predictions for consumption rates.

According to Walsh the story out of China was being mistold, and that growth in the country is strong, even though it is changing.

“This year’s estimated increase of seven per cent in Chinese GDP is just over $1 trillion, larger than the economy of Poland,” Walsh said.

“The nature and mix of growth in the Chinese economy is also changing, and I will say more on this shortly, but let’s be clear that in this new normal we will still see continued solid economic growth from a larger base.”

Walsh said this “new normal” would see around 1 billion tonnes of Chinese crude steel production by 2030, which requires average growth of around 1 per cent per annum.”

While Li rubbished this position, he did give one positive forecast on the current market situation, stating that the April price low of US$45 per tonne is likely to be the bottom of the slide, and iron ore has already begun its stabilisation process.

“We’re likely to see a price of between US$55 to US$65 per tonne as an average for the next two years,” he said.

WA Premier Colin Barnett has now also jumped on the recovery bandwagon.

Speaking at the Africa Down Under Barnett declared: “I'm either brave enough or silly enough to suggest that we've hit the bottom.”

"Global markets are fragile but the fact that we're seeing some greater stability in commodities, oil prices, gas prices, iron ore prices – I think we have probably hit the bottom."

This was supported by JP Morgan, which – while not being bullish – has finally ended its bearish position.

However, others are expecting ongoing weakness as some bankers forecast an unlikely rise in Chinese demand as the only way for mining to grow.

The Goldman Sachs Group has outlined ongoing weakness in copper and aluminium markets, and continued pain in iron ore, unless a rise is seen in Chinese metal demands.

It went on to say cost cutting exercises by miners in an attempt to tighten operations won’t help margins in the long term.

“While recent supply cuts in copper and aluminium may appear to bring the markets closer to balance, the cuts in our view are not sufficient to do so,” analysts explained, according to Bloomberg.

“It is our view that the supply cuts confirm the bear case for these metals.

“Only a major pickup in Chinese demand is likely to be sufficient to balance metals markets.”

However this pickup is unlikely, with both major mining OEMs and economists predicting continued weakness, and no return to the heydays of the boom.

“My expectation is within China and globally that the market will pick up to a level above where we are in 2015,” Caterpillar’s head of construction equipment Tom Pellette told the Financial Times.

“But for China specifically, our expectation is that the market will rebound but we are not planning [for it to] get back to 2011/2012 levels.”

Australian economist Saul Eslake also dismissed a return to boom-like conditions.

With the last boom tied to the unprecedented economic growth in China, Eslake told the mining business community at IMARC that there was little prospect of these conditions being replicated in the future, and that despite growth in other nations, none could match the impact of population growth in China.

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