China, India markets prove slowdown prophets wrong

The world’s leading resources companies have taken UK Chancellor of Exchequer Alistair Darling’s warnings over economic woes in their stride. Darling has described the present economic condition as the worst in the past 60 years, warning that the “slump is going to be more profound and long-lasting” than people would think.

Companies have shrugged off Darling’s warnings because BHP Billiton and Rio Tinto remain firm in their belief that the demand from China, in particular, and emerging markets, including India, generally would more than compensate for the marginal or zero growth of developed economies.

BHP or Rio is not unnerved by the fact that for the first time since 2005 China’s manufacturing sector saw contraction in July and India’s GDP growth for the quarter to June 2008 fell to 7.9 per cent from 8.8 per cent in the preceding quarter. There has to be logic in putting on such a brave front. China accounts for approximately 20 per cent of BHP’s revenues and Rio is to give shape to an ambitious resources exploration programme there. Rio, in a tie-up with our NMDC, is also to scout for resources here.

A slowdown in the manufacturing activity in China in the past two months (August figures though are to be published) was not, however, unexpected. As China did not spare any efforts to make the Olympics a spectacle the world has not seen before, there was a closure of large industries in Beijing and its neighbouring cities.

The priority was to keep the Olympic city pollution-free, no matter that the industrial growth was nicked for a couple of months.

At the same time, however, the recent weaknesses in the world commodity market, caused principally by a slowdown in Western economies, has led some experts to wonder if after what was a one-way bet for an unbroken seven-year period, commodity prices had finally come to the tipping point.

China, no doubt, will now have to contend with a slackness in demand for goods exported to Western countries. Darlings’s warnings that his economic prognosis has a global ring about it will be found discomforting by policy-makers in China and India.

According to Dr Tim Williams, the director of Ernst & Young’s mining team, “The China story is the story of the mining sector. No one expected China’s growth to continue at this rate. People have said the country is in the top of the cycle since the growth first started five years ago. There is nothing very new in what is happening at the moment.”

Interestingly, for as many people who will agree with Dr Williams, there will be an equal number of dissenters.

For example, Rio Tinto, which undeniably has found a strategic ally in Chinese minerals major Chinalco to fend off the unsolicited takeover overtures of BHP Billiton, believes that China will not take much time to overcome the Olympics hangover. As investments in industry, infrastructure and urbanisation pick up after a brief Olympics-related lull, China is to record growth of 10 per cent this year and 9 per cent next year.

There is this decoupling theory suggesting that economies of China and India, being driven largely by domestic consumption, are immune to “sneezing” whenever the developed world would “catch cold”. Incidentally, exports constitute just around 10 per cent of China’s GDP.

That China’s iron ore import so far this year is running 20 per cent ahead of the corresponding period of The last year is one proof that its steel industry remains on course to achieve this year’s production target of 530 million tonnes. In non-ferrous metals too, China will be making further impressive progress. The demand for metals in India will also be growing at 8 to 11 per cent. All this will confirm that the developed world is becoming increasingly “irrelevant” to setting metal prices.

Staging Olympics was just one chapter in the unfolding China growth story. Consultancy firm McKinsey says the scale and pace of urbanisation in China will move at an unprecedented scale to create by 2025 as many as 221 cities with population of more than a million compared with 35 million in Europe now. In 20 years, China will build nearly 50,000 skyscrapers.