What China Bull Story Tells Us About Where Metals Prices Headed

Continued from Part Two.

As we have seen in the past, when Beijing sets its mind in a particular direction, it generally achieves the desired result — so while the pace may slacken or rise, the general trend is clear. Where does that leave metals prices and those industries, indeed those countries, which have set their long-term futures on the China bull story?

The ever-entertaining and enlightening video column The Short View by the FT’s James Mackintosh explores the position of Australia, whose economy is arguably entwined with the fortunes of China more than any other. Reduced infrastructure investment will have a profound impact on Australia’s resource sector. The economy has sucked in vast amounts of capital to fund its mining boom and as a result, run a current account deficit for 30 years, matched only by New Zealand and Greece – note what happened to Greece when the funds dried up.

All that wealth has been largely squandered, leaving the country with a high cost of living. Figures quoted suggest five of the world’s top fifteen most expensive cities are in Australia, and yet in spite of those massive resource exports, the country still has only managed to run a trade surplus for seven out of the last forty years.

While the mining giants remain outwardly bullish on China, boardrooms must be debating the ‘what ifs’ of lower demand. Some commodities will be hit more than others (energy in the form of oil and thermal coal could continue to rise strongly in a more consumer focused economy), but iron ore, coking coal and base metals may be less so.

China’s economy will undoubtedly continue to grow; the question is in exactly what way(s) — and how will changes affect the rest of the world.

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