Commodities gave global equities a run for their money in the first quarter – but have flagged since. Standard & Poor’s GSCI Spot Index of raw materials is down 12 per cent from its February peak. Rightly or wrongly, investors treat commodities as an homogeneous group – hence the broad sell-off in resources stocks. But the demand dynamics vary. The oil price has slipped on lower US and European consumption and easing geopolitical stress. Iron ore demand has moderated as export-led growth in Asia adjusts to the slowdown in developed economies, but underlying demand is still strong. In China, consumption of raw materials by exporters is giving way to rising domestic demand. China’s output will still grow much faster than most developed economies, but at a more modest clip in the high single-digits.
And resources companies will grab a slice of that, thanks very much. Caught out by Asian tigers’ growth at the turn of the century, they have invested hard in low-cost, long-life capacity. Sure, miners accept China will not buy commodities at the current pace forever. So steel intensity will peak as China’s infrastructure development matures, to be replaced by higher demand for commodities such as potash. China accounts for less than a fifth of global potash demand now, but more than half of iron ore demand.
Miners must refine investment calls. Last week, BHP Billiton said it was to ease capital expenditure. In February, a year into its $80bn five-year capex target, it talked of living within its means. Fair enough: the iron ore price is down nearly 30 per cent since BHP set that target. Rio Tinto could also moderate capex.