Economic growth in China may start to slow as the world’s metal producers fail to keep up with Chinese demand. But that shouldn’t prevent copper from hitting $10 in next three years: consultant.
An insatiable appetite for metals will lead to an inevitable slowdown in China’s economic growth rate as the major producers struggle to keep up with the Asian country’s demand, a metals sector consultant said Tuesday.
“It’s not going to be a crash, but the breaks are coming on,’’ said Jack Lifton, a metals industry consultant, who is also the founding principal of TMR Metals Research in Detroit.
One of a panel of experts who spoke at the PDAC mining convention in Toronto , Lifton said the world does not have the productive capacity to feed the appetite of a country like China, which has experienced near double digit growth in the last 30 years.
In order to feed that growth, China has been consuming massive amounts of metal, including 38% of the world’s copper production. But in order to curb price inflation, the Chinese government is currently trying to slow the economic growth rate to about 7% from 11% in 2010.
“What people don’t seem to understand is that it takes about 10 years to develop a mine,’’ said Lifton. “It also takes a huge amount of money.”
Major producers who would feel the impact of any slowdown in Chinese demand, include the likes of BHP Billiton Ltd. (NYSE: BHP, Stock Forum), Rio Tinto Plc (NYSE: RIO, Stock Forum), and Vale SA (NYSE: VALE, Stock Forum).
“It’s a golden afternoon for Rio Tinto, BHP and Vale. But it’s not going to continue,’’ said Lifton, who conducts due diligence at mining and refining companies for institutional investors.
Still, on the mining mergers and acquisitions front, it is the Europeans and Americans that continue to dominate,’’ said Wesley Mark, a partner, China Desk, with PricewaterhouseCoopers. China accounted for only 6% of the M&A deals in 2010 and 11% of the deal value.
But Mark said China is expected to up its game a bit in the next few years, leaving it with a bigger share of the transactions. He said China’s Sovereign Wealth Fund has opened an office in Toronto, a move that may signal its intent to take a more aggressive approach on the M&A front.
Meanwhile Lifton said investors can best position themselves to profit from Chinese growth by buying physical metals. He expects copper prices to hit US$10 a pound within the next three years, up from this week’s US$4.32 per pound level.
Lifton also likes the prospects for rare metals such as Terbium (used in fluorescent lights) and Dysprosium (which is used to manufacture magnets). He says price moves for these metals could be “explosive.’’
