Mixed Start to Lunar Year

Mixed news for the Chinese economy in first week of Lunar New Year. Iron ore retreats from the two-year high, and most metals weaker, but analysts increasingly bullish for copper's prospects.

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First the good news; consumer spending in China over the week-long new-year holiday rose 8.5% compared with last year's equivalent. The bad news is that this increase compares badly with last year's 10.2% year-on-year growth with 2017, and is the lowest rate of growth since the data was first tracked in 2005.

Pessimists note that this is the latest sign that shoppers in the country are feeling the effects of China's decelerating economy. Optimists point to the fact that it is still a considerable year-on-year improvement. These statistics matter because consumption is increasingly important for Chinese economic growth, and hence, indirectly, for the international mining industry.

Meanwhile, foreign investors seem confident that the Chinese economy will remain buoyant, and they poured a record US$9 billion into Chinese equities in January. Investors are clearly betting that the mainland market has bottomed after a disastrous 2018. They will also be encouraged by positive news from the US-China trade talks, the latest round of which commenced on Monday, February 11. A deal is sought be the end of this month, with President Trump threatening to impose higher tariffs on Chinese imports on March 1.

Retail sales in the US plunged in December, falling by the sharpest amount in almost a decade. The Financial Times notes that the retail slump "rattled markets", and "added to evidence of a slowdown in the broader economy".

Another article in the Financial Times last week was much more bullish for mining, and for copper in particular. The newspaper noted that copper prices have rebounded this year (from barely US$5,800/t in January to threaten US$6,300/t) as investors better understand the burgeoning demand from China for the red metal. Much of this is linked to the need for copper in electric cars, which require three times as much of the metal as in conventional vehicles.

Citigroup expects the number of petrol cars sold in China to fall 9% this year, while the number of electric cars will rise 53%. If so, this will result in a net increase of 0.3% in copper demand from the sector. Over the longer term, Citi forecasts that copper for electric cars will make up two-thirds of demand growth for the metal between 2018 and 2030. The bank expects copper to reach US$6,700/t this year driven by an overall 2% growth in Chinese demand and resolution of the trade dispute between China and the US.

Despite the rosy longer-term outlook, copper retreated last week, like most major metals, closing on Friday down 0.1% at US$6,196/t. Aluminium retreated 1.2% over the week, closing at US$1,859/t, with nickel down 1.7% at US$12,385/t and zinc off 1.4% at US$2,659/t.

The biggest loser last week, however, was iron ore, with the 62% Fe material falling 7.3% to US$87.4/t. This marks a retreat from the previous week's two-year price high following production cutbacks by Vale SA in Brazil in the wake of the Feijao tailings dam disaster. Police last week arrested another eight Vale employees, after five people were arrested in January. Meanwhile, Vale evacuated about 200 people in an area near its Mar Azul iron ore mine in Minas Gerais state as a precautionary measure, on fears of another tailings dam failure.

The price of gold improved 0.1% last week to close on Friday in London at US$1,311/oz. Despite the higher gold prices since the end of September last year, Goldcorp Inc. swung to a net loss of US$3.98 billion for the fourth quarter of 2018, from a net profit of US$242.0 million recorded a year earlier. Results from the period took a hit from a US$3.88 billion impairment related to Newmont Mining Corp.'s takeover bid in January.

Barrick Gold Corp.'s net loss widened in the fourth quarter to US$1.2 billion, from US$314 million a year earlier, mainly due to the impact of impairment charges. Overall, the company reported a US$1.55 billion net loss for the year, which it said was mostly related to US$900 million in net impairment charges at the Veladero and Lagunas Norte gold mines in Argentina and Peru, respectively. Meanwhile, in a final report as a separate issuer, Randgold Resources Ltd reported a net attributable profit of only US$29.3 million, compared with US$87.1 million a year earlier; mainly due to merger-related costs.

There was more bad news last week for the coal industry in Australia. The Land and Environment Court in New South Wales has cited climate change as a contributory reason for blocking Gloucester Resources' application to develop the Rocky Hill mine.

Update on Exploration Sector

S&P Global Market Intelligence reports that although drilling activity increased in January, the number of initial resources and significant financings by junior and intermediate companies declined sharply. 

Positive project 'milestones' remained fairly strong for a second consecutive month, an indication that the overall strength in drilling and higher exploration spending in 2018 likely paid off. However, the number of financings by junior and intermediate companies fell to 100 in January from 238 in December, and the US$104 million total raised was down 74% from the US$397 million garnered in the previous month — an all-time low. 

Companies listed on the Canadian exchanges accounted for 59% of the funds raised, and firms on the Australian Securities Exchange contributed a further 31% of the total.

Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.