China SignPost™ (洞察中国) #69–Elephant in the Room? Are mining companies on target as they look to India to help compensate for China’s lost commodity demand growth?
Gabriel B. Collins and Andrew S. Erickson, “Elephant in the Room? Are Mining Companies on Target as They Look to India to Help Compensate for China’s Lost Commodity Demand Growth?” China SignPost™ (洞察中国) 69 (23 December 2012).
China SignPost™ 洞察中国–“Clear, high-impact China analysis.”©
China’s economy continues to produce a chorus of negative news—slowing earthmover sales, weak coal demand, and a broader acceptance by the leadership that the country appears to be moving onto a path of slower economic growth.
Accordingly, mining companies dependent on the Chinese market are looking for other regions to fill in the growing gap between the China-driven demand level they had planned for and what the market is actually yielding. The evolving content of mining company investor presentations suggests that an increasing number may be tweaking their earlier pure China emphasis and emphasizing India’s commodity demand more heavily than before as they look to other emerging markets to provide growth.
To understand how India is viewed within key boardrooms, we use the following proxy: we search for a given corporation’s initial mention in its investor presentations of India’s capacity to provide commodity demand growth—on a scale that implies it would be capable of at least partially compensating for a slowdown in the pace of Chinese demand for that commodity. This more specific definition helps screen out simple incidental mentions of India and focuses the inquiry on communications that more closely reflect managements’ prevailing view on the likely scale and growth rates of future Indian and Chinese commodity demand relative to one another.
Managements of major natural resource companies have long viewed India as a significant global commodity demand source. However, the shift reflected in the presentations is noteworthy because it suggests that India is no longer viewed as simply complementing Chinese commodity demand growth. Rather, it is being viewed as being large enough to substitute for lost Chinese demand as the Middle Kingdom’s growth slows down faster than many market participants anticipated. It remains to be seen whether Indian commodity demand—especially for coal and copper—will be sufficient to help substantially offset the deficit resulting from China’s natural resource demand moving onto a slower growth trajectory sooner than expected. …
Implications
Indian demand for commodities such as copper, iron ore, and coal is likely to grow substantially in coming years as the country struggles to modernize its infrastructure and fight against power shortages by beefing up its electricity transmission system. The political motivations are strong, for in late July 2012, a massive power outage plunged 680 million people into darkness in 18 Indian states. Yet because Indian political decision making regarding large investment projects and reforms to legal regimes governing private business activity can be chaotic, the demand for the commodities is likely to be “lumpy” and feature more fits and starts than the steadier “ramp” trajectory growth that China delivered during its boom period.
Commodity investors and strategic planners should also bear in mind that while combined Chinese and Indian demand growth for key bulk commodities is likely to remain substantial in coming years, China is very likely headed onto a path of slower growth and India by itself will not be able to entirely supplant the lost demand that results from China’s slowing growth rates. India will to some extent offset the effects of China entering the slower growth part of its S-curve trajectory as China grapples with chronic health problems, inflation, pollution, and other headwinds. However, India will not be able to arrest the trend and the ongoing global pullback and postponement of many hard rock mining investments will not end at the hands of Indian growth alone.
