A truck is loaded with iron ore at a BHP Billiton mine in West Australia's Pilbara region.HO/Reuters
China's waning appetite for commodity imports is sending shudders through a mining sector still recovering from the rout of 2008, helping to drive down prices and stocks.
A sea change is taking place as Chinese manufacturers eat through their inventories while domestic producers of key commodities ramp up simultaneously. China also appears to be stopping short of restocking, hoping to take advantage of falling prices.
Europe's troubles are also feeding into the volatility, and a proposed new Australian mining tax is also hurting miners operating in the region.
All in all, investors are concerned that commodities have hit a wall, at least for now, and miners are watching closely to see if demand suffers.
"Latest production and trade data for April, 2010, confirm the trend of a slowing in China's net imports of commodities," analysts at Macquarie Commodities Research said in a research note. "This reflects an ongoing destocking in most Chinese commodities, something that started in [the third quarter of 2009] and also surging domestic production of commodities as imports are replaced with domestic production."
Prices for such commodities as copper, nickel, zinc and iron ore - key to construction and manufacturing that drive economic growth - have fallen between 15 and 25 per cent in recent weeks, after reaching levels not seen since before the global financial crisis hit in late 2008.
Then, miners reacted swiftly to falling prices, shelving projects and cutting production, as the global crisis wiped out years of gains.
Prices were also believed to be driven up earlier this year by overzealous investors with high hopes for a U.S. recovery and China's economic engine continuing at full speed. Their outlook has been tempered by both Europe's economic woes and slower expansion of China's economy - with growth expected to drop to about 9 per cent later this year from a red-hot 12 per cent in the first quarter.
All eyes are on China because it accounts for nearly 40 per cent of world consumption of key commodities such as copper, considered a gauge of economic conditions. That compares to about 16 per cent for Western Europe and just over 10 per cent in the U.S.
Major producers such as BHP Billiton Ltd., Vale SA, Rio Tinto and Canada's Teck Resources Ltd. have seen their shares fall by about 20 per cent from highs reached earlier this year.
"It could be that the peaks this year to date have been the peaks," said Philip Klapwijk of London-based metals research firm GFMS Ltd.
The downward trend is described as the "second phase" of the mining share cycle by RBC Dominion Securities, which sees stocks moving sideways "in a wide, volatile range" for the next few months.
While the market picture appears bleak, miners are maintaining plans for production and future projects, believing China's demand will remain strong for the foreseeable future.
"There is no sign of a let up in demand," said Teck chief executive officer Don Lindsay. "We are watching very closely to see if there's an actual turn down, but at this stage we are carrying on with all of our growth plans."
For Teck, that means pushing ahead with plans to increase its coal production by more than 20 per cent this year, to about 25 million tonnes, and expanding its Antamina copper-zinc mine in Peru. Teck is on target to grow its overall copper production by 40 per cent in the next two years, Mr. Lindsay said.
"I think ultimately nothing has changed in terms of the fundamentals of supply and demand," said Paul Blythe, CEO of newly merged copper company Quadra FNX Mining Ltd., which is also set to close a joint-venture agreement with a Chinese power company to develop copper projects in Chile.
Many miners are better prepared for a possible downturn today than before the recent recession, said Catherine McLeod Seltzer, chairman of junior explorer Bear Creek Mining and a member of the board at Kinross Gold Corp.
"Bank-provided project finance never came back after the '08 crash, so everyone knew they would have to rely on equity raises - which they did to the tune of billions - to put themselves in a strong position to complete their projects," she said.
There is also the risk of a knee-jerk reaction to the correction, which would put miners behind in production if prices run up again.