Commodity Blog

AS investors were wiping $110billion off the share market on Tuesday, out in Western Australia’s Pilbara region the red dust was swirling faster than ever as iron ore was blown up, dug up, trucked, railed and shipped at record rates and at a scale unheard of five years ago.
While brokers in city offices were glued to their telephones and trading screens, aghast at the sharp share price falls, Asian power utilities were also on the phone bidding up spot coal prices as the Queensland floods cut production and exacerbated already tight markets for Australian coal.
Welcome to the parallel universes of share trading and mineral digging, where credit and recession fears are driving the share market down, and ongoing real demand from China is driving the country’s mining export boom.
Yesterday, the world’s biggest miner, BHP Billiton, helped remind the skittish market of the scale of the long-term demand for minerals, reporting big increases in production, including a 7.8per cent rise in West Australian iron ore shipments. It follows similarly strong numbers last week from Rio Tinto, which BHP is stalking in a $150 billion takeover play aimed at capitalising on rising commodity demand from China and India.
Owen Hedgarty, boss of $4.5billion Melbourne-based miner Oxiana, yesterday sought to cut through the market panic by saying he had not seen any slowing of Asian demand for his company’s copper, gold and zinc. “The fundamentals remain very strong,” he said after watching from the sidelines as the market shaved as much as $1.7 billion off Oxiana’s capitalisation in just over a week.
While there is nervousness that a US recession and sub-prime contagion could slow Chinese demand, the scale of China’s industrialisation remains the key driver of its mineral buying and appears set to continue to support relatively strong commodity prices.
Mining shares bounced yesterday with BHP up 9.3 per cent and Oxiana rising 12.4 per cent.
“The fear is that China gets caught up in the contagion … I don’t rate that risk highly yet,” Access Economics director Chris Richardson said.
“I think metal demand will remain robust, but with some rising risk in 2009.”
The risk involves inflationary pressures in China. According to Westpac head of economics Bill Evans, China’s domestic economy is driving commodity demand, which is set to be largely unaffected by a US recession. “If Asia slows, it will be the result of internal imbalances, not any external shocks,” he said.
ANZ’s chief commodities strategist Mark Pervan agreed. “This is really a US financial contagion story; this isn’t Chinese domestic development, which is what you focus on when looking at buying BHP or buying copper,” he said.
He noted that commodity prices were relatively stable, with nickel prices up 1.3 per cent this year, and copper up 5 per cent.
While the share falls can be expected to hit consumer spending and business confidence, Mr Evans said the economy was still benefiting from “tail winds” such as a mining-fuelled improvement in the terms of trade.
Australian resources companies have invested heavily in the China boom. According to the Australian Bureau of Agricultural and Resource Economics, in October there was $57.9 billion invested in 91 mineral projects, either under construction or committed to, two-thirds more than a year before.