Rio predicts post-Olympics boom

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By Rebecca Bream and Chris Flood
Wednesday, August 27, 2008
  

  
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surge in demand from China could cause a bounce in commodities prices as restrictions on industrial activity around Beijing are eased after the Olympics.

Vivek Tulpule, chief economist of the mining group Rio Tinto, said the region affected by the restrictions, which were introduced to try to improve air quality, contributes more than a quarter of China's gross domestic product.

“The Olympics have accentuated the usual summer slowdown in commodities demand,” said Mr Tulpule in an interview with the Financial Times. “When activity is allowed to start around Beijing there will be a post-Olympics jump.”

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Rio Tinto has rejected a takeover offer from rival BHP Billiton and while awaiting clarification from European regulators over whether a bid can proceed, both companies have stepped up efforts to highlight the long-term value of their businesses.

Investors in commodity markets have been struggling to assess how China's economy will perform after the Olympics as the country is believed to have built up substantial stocks of crude oil to avoid fuel shortages during the games.

China is the world's biggest consumer of commodities such as copper and iron ore, and is Rio's biggest customer. Mr Tulpule expects Chinese GDP growth to moderate from 10 per cent this year to 9 per cent in 2009 but says domestic consumption and investment will remain resilient, even if export growth slows.

He said many of the less developed, highly populated provinces in Chian's interior, such as Shaanxi and Jiangxi, were showing high rates of fixed asset investment, increasing at above 35 per cent in the first half of the year. This is taking the form of investment in such things as roads and airports and is part of the urbanisation of these regions.

Most of these provinces consume significantly less steel than Shanghai or Beijing on a per capita basis. Mr Tulpule says that if steel consumption in Henan province with a population of 98m, were to move towards Japanese levels, demand would rise by 41m tonnes, the equivalent of Germany's annual steel consumption.

He predicts that strong demand from China and other emerging markets will make up for weaker demand for commodities in the developed world. “Despite the panic about falling metals prices, I am seeing very strong markets for 2009.”

Mr Tulpule explained why Rio believes the six-year metals bull market could last for another decade. The supply of commodities is likely to be tighter than the market expects, said Mr Tulpule. A shortage of skilled workers and specialist mining equipment means that existing mining operations often face difficulty in increasing output, and new mines take longer and cost more to build. Supply will also continue to be disrupted by strikes and power shortages, such as the blackouts that affected South Africa and China this year.

Although zinc and nickel prices have fallen, both were still higher than their pre-2005 levels, and copper and aluminium markets were still going strong.