While rising inflation,the war in Ukraine and fears of an economic downturn are darkening the outlook for commodities,investors are betting that China,which accounts for more than 50 per cent of the world’s demand for raw materials,will provide some insulation for Australia’s $400 billion resources industry.
Investors are betting on Chinese stimulus programs boosting demand for Australia’s mining exports.Louie Douvis
Ausbil Global Resources Fund said there was a “divergent story developing in the world economy,between the East and the West” as surging inflation and interest rate rises risk sending Western economies into recession. The fund’s co-portfolio managers Luke Smith and James Stewart said China,which is under less inflation pressure,had already commenced the process of stimulating growth and was expected to accelerate stimulus in the second half of 2022 and into 2023.
“While Western developed economies are slowing,China is reopening,and is likely to accelerate growth coming out of recent hard COVID lockdowns through significant stimulus,” they said.
China is by far the biggest customer of Australia’s most lucrative export,the steel-making raw material iron ore. The country accounted for $126 billion of Australia’s iron ore export earnings in 2021 alone.
However,iron ore producers including BHP,Rio Tinto and the Andrew “Twiggy” Forrest-led Fortescue are facing weaker market conditions this year,with iron ore prices dropping to as low as $US100 ($145) a tonne as COVID-19 restrictions and a property sector slowdown soften steel demand in China.
Mining giant BHP last week said it was bracing for operating conditions to remain “volatile” in the near term,but expected China’s economy to improve throughout the financial year.
“Against the backdrop of what we see as slower overall global growth as central banks put in place measures to deal with the higher inflation we are seeing in most developed economies,if I contrast that with China,China is trying to come out of its COVID lockdowns,” BHP chief executive Mike Henry said. “We see that as being a tailwind for global growth ... and we are expecting a degree of stimulus in China as well.”
Rio Tinto,the largest Australian producer of the steel-making material iron ore,said China was not experiencing the same inflation pressures as the US or countries in Europe,which was “good news for Rio Tinto” because it gave Beijing more scope for stimulus.
“You just look at what their growth targets are,and that means they will probably have to do some stimulating of the economy,and they know exactly how to do that,” Rio Tinto chief executive Jakob Stausholm said. “I am cautiously optimistic,but not naive – there are headwinds.”
Although the world was not facing an economic environment comparable to the 2008 Global Financial Crisis,Ausbil expected “some similarities” in the way China would respond by using aggressive stimulus to turbocharge its economy,which would require significant demand for raw materials to build infrastructure.
Between 2008 and 2009,iron ore demand in China grew by 16 per cent and 41 per cent respectively,supported by stimulus activity,Ausbil said.
Demand for copper in China grew 20 per cent a year,even as demand in the rest of the world fell by an average of 10 per cent. China’s nickel demand fell 13 per cent in 2008,but grew significantly from 2009 despite dropping by 15 per cent in the rest of the world.
“Although demand may soften from the West,markets are tight,and any acceleration from Chinese demand should underpin prices that are already stretched,” Smith and Stewart said.
“From an investment perspective,this does not mean we are aggressively invested in the current environment,given significant uncertainty,but this view does support us maintaining a positive net exposure in the current market.”
The Business Briefing newsletter delivers major stories,exclusive coverage and expert opinion..