Metals Shine as China Marches On

09/20/2010 12:01 am EST


Lawrence Roulston

Editor and Publisher, Resource Opportunities

With gold, copper, and iron ore prices on the rise, junior producers remain undervalued, writes Lawrence Roulston in Resource Opportunities.

For those investors who take a global perspective, there are truly exceptional investment opportunities. In the midst of Western gloom, the copper price is close to its record high. Iron ore is so far into record territory that they would have to rewrite the record books. Most of the metals have seen strong gains in price over the past year.

Metal prices are up sharply, representing strong fundamental demand. In case anybody remains unclear on why metal prices are up, let me review the global picture for the metal markets. China is now the second largest economy in the world. Last quarter, the Chinese economy grew at a pace of 10.3%. Headlines noted that the Chinese economy was “slowing,” as growth in the previous quarter had been over 11%.

China is by far the largest consumer of metals. As a developing economy, it uses far more metal per unit of economic activity than a mature economy. With economic growth in China (and India, Indonesia, Brazil, and other developing nations), global demand for metals continues to increase, even with the West mired in a period of slow growth. And, while demand for metals continues to grow, new supplies of metals are constrained.

I am not advocating that anyone speculate on higher metal prices. However, I can say with a high degree of certainty that the mining industry will need new sources of supply.

The following are some brief observations from a quick [recent] trip to Shanghai. The investor mood is somewhat cautious, as China's growth in the latest quarter cooled off. The slowdown is not a surprise, as the government is intent on holding the growth rate to about 10%. Investors are more concerned with the situation in America and Europe, thinking that further slowing there will impact China.

That concern is misplaced: Domestic consumption in China is soaring, offsetting weakness in the export markets and keeping the economy in high gear. Import growth is outpacing export growth, bringing the trade surplus down to $20 billion in August.

China remains the top destination for foreign direct investment. In the first seven months, the country received $58 billion from overseas, up 20% from a year ago. The figure is expected to reach $100 billion by year end. Even more significant, China is moving into the number-two spot worldwide (behind the US) for outbound direct investment, with that figure projected o reach $50 billion for the year. Much of the outbound direct investment relates to the acquisition of commodities. Another example is the takeover of Swedish carmaker Volvo by a Chinese automaker (Zhejiang Geely Holding Group—Editor).

Infrastructure development is continuing at a torrid pace. Recent projects include a 680-kilometer rail line to bring resources from the western part of the country to the coast and a 2,380-kilometer gas pipeline to bring gas from neighboring Myanmar.

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