Big miners dare to bet on the record boom commods

Any investors willing to bet that the commodities boom is running out of steam may need both courage and patience: major miners have wagered more than $110 billion on the opposite view.

BHP Billiton (BHP.AX), Rio Tinto (RIO.AX) and Xstrata (XTA.L) have committed themselves in the last two weeks to spending vast sums on expanding production of iron ore, copper, coal and other raw materials over the next five years.

In decades past, that would signal the beginning of the end, the exuberance that leads to oversupply and tumbling prices, but this time the miners say it’s different — and, for once, commodity markets are inclined to believe them.

“The growth fundamentals certainly support these big expansion projects,” said John Robinson, chairman of investment vehicle Global Mining Investments (GMI.AX) whose funds are managed by BlackRock (BLK.N), the world’s biggest asset manager.

The difference this time can be summed up in a word: China. Or maybe two: China, India.

UNPRECEDENTED

Industrialization and urbanization on the scale of China are unprecedented: in three decades, the proportion of its people living in cities has more than doubled to 45 percent, creating record demand for steel and its raw materials.

China boasts around 170 cities with more than one million residents, compared to Europe with about 35, and there are still 300 to 400 million people expected to move from the countryside to the city over the next 20 years, most of whom will live in the country’s rapidly expanding forests of apartment blocks.

A typical 90-square-meter (970-square-foot) apartment in China needs six tonnes of steel and each tonne of steel requires 1.7 tonnes of iron ore. And every new building needs to be wired with copper and powered mostly by coal-fired electricity.

Add a fast-urbanizing India to the mix and it’s not hard to see why billions are being spent to dig more iron ore, the primary ingredient in steel-making.

SOME DOUBTS

Outright pessimists are hard to find in commodities markets, but doubts are growing, especially over the near-term outlook, with traded iron ore prices and copper at record highs and steel-making coal prices up more than 30 percent in 12 months.

Some analysts say inflationary concerns and rising interest rates in China, coupled with forecasts for slowing growth in emerging markets overall, could take the polish off commodities.

“We have seen record highs…but you can clearly see that demand is cooling down a little on the current high prices,” Commerzbank analyst Daniel Briesemann said.

Though iron ore and coal prices have yet to show signs of softening, copper is off its peaks, touching a three-week low on Thursday, and aluminum has seesawed as London Metals Exchange inventories near record highs.

Citigroup does not expect copper prices to go much above current levels of around $10,000 a tonne and it forecasts iron ore to top out a current levels of $190 a tonne, then fall to $160 mid-year and by 2015 cost only $80 a tonne.

Australia & New Zealand Bank forecasts a nearly across-the-board decline in commodities prices through to the end of 2013.

“The biggest headwind for all these companies is the macro- environment, which they have very little control over,” UBS commodities analyst Glyn Lawcock said.

NO DOUBTS DOWN UNDER

But try selling that story in a place like Australia, one of the world’s top exporters of everything from nickel and copper to iron ore, natural gas and coal.

Big resources projects Down Under, either underway or firmly committed, totaled some A$133 billion ($134.5 billion) by late 2010, representing 10 percent of total gross domestic product, the Australian Bureau of Statistics says.

BHP Billiton, Rio Tinto and Xstrata account for a chunk of that spending, but are also spending big worldwide.

BHP Billiton, alone, plans to spend $80 billion over the next five years, focusing on iron ore and its Olympic Dam copper-uranium project in Australia and potash in Canada. Rio Tinto is focusing on iron ore and Xstrata on copper and coal.

Other miners are racing to cash in on the boom: Grupo Mexico (GMEXICOB.MX) is spending $1.9 billion in “coming years” to boost copper output, and Kazakhstan’s Kazakhmys KAZ.L. plans to spend $6 billion in four years on energy and mining projects.

Africa is also gearing up sharply: Mozambique, for one, expects to take its annual coal exports from one million tonnes a year to 10 million in 5-6 years.

Normally, that kind of supply-side response would sound alarm bells for commodities markets, but BHP Billiton chief Marius Kloppers isn’t buying a boom-to-bust scenario.

“While we expect a slowdown in the growth rate of global commodity demand in calendar year 2011, the economic environment still underpins a robust near-term outlook for our products,” Kloppers said, after the company announced a record $10.7 billion half-year profit this week.

“We expect markets to be volatile and event driven; however the continuing urbanization and industrialization of emerging economies, which is still in its early stages, should provide strong structural support over the long term,” he added.

Miners are born optimists, but commodity investors are a much more skeptical breed — and they also see some encouraging signs that miners are being disciplined with their investment.

Eagle Mining Research analyst Keith Goode highlighted the fact that the major miners say they are now backing off from mega-sized mergers and acquisitions and are instead plowing their profits straight back into the ground.

“Expansion through organic growth is more of a sign in faith in the longer term picture,” Goode said. ($1=0.988 Australian dollars)

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