As the Chinese economy develops into a more consumer-driven beast, the world's mining giants are fighting to look prepared.
No surprise that China was the silver lining as Rio Tinto (Berlin: CRA1.BE - news) last week announced it was targeting $5bn (£3.1bn) of cost savings across its business by the end of 2014 given the “volatile” macro-economic outlook.
As the FTSE 100 (FTSE Index: EO100.FGI - news) miner, the second largest in the world, warned of “major uncertainties” for American and European growth, it could add least offer investors reassurance that it was “guardedly optimistic” about China, predicting a slight rise in the country’s GDP growth to over 8pc next year.
Since China is the world’s biggest consumer of commodities, a pick-up in its rate of expansion would of course be welcome to the world’s miners.
However, the billion-dollar question as to what pace China can achieve over the next few years is increasingly being twinned with another.
What are the raw materials China and other expanding economic powers will need, and in what quantities?
As Goldman Sachs analysts put it in a recent note, “the sector is not broken, just evolving: [but] with the tailwinds of the commodity super cycle receding, we believe that the 'easy ride’ of mining company profitability from commodity price escalation is over”.
A key factor in how companies ride out this transition will be how ready they are to meet changing demand for certain commodities. As an economy matures, it tends to move away somewhat from the “early cycle” commodities eaten up during the process of industrialisation - iron ore, coking coal, steel - to increasingly rely on other raw materials.
For example, in coming years demand for the steel-making ingredient iron ore should grow at a slower rate than the Chinese economy, predict analysts at RFC Ambrian, “as infrastructure projects linked to industrialisation decline and make way for urbanisation projects that are less reliant on steel.”
In contrast, those materials which should perform more strongly in an increasingly consumer-driven economy include energy commodities - such as oil and gas - and 'soft’ commodities - those that are grown rather than mined. In the same vein, potash, a fertiliser, is seen as late-cycle, as its use gets as boost from the rising middle classes’ richer diets.
It has to be said that Chinese demand for early-stage commodities is not expected to suddenly tail off. Rio Tinto does not forecast Chinese steel demand growth to peak, at around 1bn tonnes, until “towards 2030”.
None the less, mining is a business which looks to the long term, given how long and how much money it takes to get projects up and running. As a result, exposure to later stage commodities is something companies are increasingly making noise about.
As Rio Tinto last week announced its cost saving target, it also noted that its business in titanium dioxide - used in paint - meant it is “set to benefit” as emerging economies “become more consumption-led”.
It was an interesting point to make given the main focus of Rio’s business is iron ore, expected to account for around three quarters of its earnings this year.
Meanwhile Marius Kloppers, the head of BHP Billiton (NZSE: BHP.NZ - news) , its rival and the world’s biggest miner, was briefing reporters on how “we’d rather put our eggs in more baskets, which does not only mean the investments you’ve made, it also means the options for investment”.
Of course, there are many other factors that investors will use to judge miners, such as where their projects sit on the cost curve - seen as a Rio strength.
As it was, the Goldman analysts judged that out of Rio and BHP, the world’s two biggest miners, BHP had the advantage - due to its broader commodity mix and exposure to late cycle commodities through its energy, shale gas and oil, and potash assets.
“As for Rio, we see its lack of diversification and over-reliance on iron ore earnings and growth as a potential long-term disadvantage,” they concluded.
Expect to hear more of this debate.
Miners told they can do more to cut their costs
Miners could significantly reduce the cost of large capital projects by improving planning and addressing workforce shortages, according to new research from consultancy Accenture (NYSE: ACN - news) .
The tremendous scale and complexity of mining projects mean that budget overruns and delays in completion are not unusual. Among the contributing factors are infrastructure needs such as roads, ports and electrical power in less developed regions; the lack of talent and skilled workforces; and environmental and regulatory requirements in developed regions.
When asked what typically causes delays in project schedules, mining executives cited the availability of talent (57pc), new or unconsidered regulatory requirements (45pc) and insufficient detail during the planning stage (42pc).
“The potential savings and returns through effective management and delivery of a capital project investment can be huge,” Jose J Suarez, of Accenture’s North American Mining industry group, said.
“Keeping on budget and within planned timelines across a portfolio of multi-year projects can save millions for a company - in today’s environment strong project management can be an important competitive advantage,” Mr Suarez added.
Copper benefits from market relief on China
“The market is now beginning to appreciate that the worst is over in terms of the growth numbers in China and it does look like things there are beginning to show a slow and gradual improvement,” Gayle Berry, an analyst at Barclays (LSE: BARC.L - news) Capital, said.
Copper is one of the most economically sensitive metals because of its wide range of uses - and supply is tightening. Copper stockpiles monitored by the London Metals Exchange are down by about a third so far this year.