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Commodity run to continue for next two decades – VM Group

The VM Group says while China can not escape economic slowdown in the world it is still a long-term, vast growth story. 16 Oct 2008, London (Mineweb) By Tessa Kruger

The Virtual Metals Group believes the commodity story will remain unchanged for the next two decades as current financial turmoil ultimately only spells a period of putting new commodity projects and expansion projects on ice.

The VM Group said in its latest Fortis metals monthly report that China could not escape some negative impact from the wider economic slowdown in the world, but China was still regarded as a long-term "vast" growth story, in metals, energy and soft commodities.

The chance of a major price recovery in some base metals appeared "incredibly remote" at the moment. But the chance of base metals prices spiking to new historic highs early in the next decade increased the longer the pain persisted in capital markets and the underlying real economy.

The report said this chance would increase as recession-induced cutbacks in supply ran into a resurgence of Western world demand and prolonged growth in China and wider Asia.

China's rise to economic power was not simply the result of exporting cheap goods to the West. Its growth had been and would be driven more by internal investment, accounting for more than 40% of its gross domestic product.

This would continue over the next two decades and more than half of this investment was estimated to go into infrastructure and property.

Taking copper as a benchmark, the report said copper prices still had to fall far before current production levels were threatened. About 90% of copper producers were profitable at $3,000/t.

The factor that would impact copper supply and supply of other metals was not so much falling demand, but rather the constraints of raising finance in the current uncertain capital markets.

However, if China's economic growth did not slow in line with slower growth elsewhere, mine supply of base metals would struggle to meet rising demand over the long term.

Demand Growth Strong

Commodity demand growth was going to remain very strong for the next two decades and possibly longer, largely as a result of the "pressing need" for China and other fast-developing economies to catch up with the more advanced economic nations.

The report said within Asia, the biggest urbanisation growth would take place in China, with the country accounting for almost one-fifth of projected total world urban population growth during 2006-2030. India would follow close on China's heels.

The result was that demand for buildings, roads, railway connections and power generation would continue to grow at an unprecedented rate.

The current international economic slowdown or recession would delay but not destroy this, as the momentum behind it could be self-sustained.

China's political structure or centralised command economy and its high rate of savings meant that Beijing could pursue its ambitions relatively untouched by "paralysis" in global capital markets.

Middle Class Aspirations

The VM Group said its confidence that demand for commodities would continue growing strongly in the long-term on the back of growth in China and India, was not based on demographic momentum alone. It had as much to do with the "interconnection" between politics and economics.

While affluent urban dwellers already owned what they wanted, this category of consumer was largely found in Beijing, Shanghai and Guangzhou.

There were more than 20 other cities now growing rapidly in China that would see more than 300m new urban dwellers, the majority of them migrants from rural areas, over the next two decades. And their aspirations would be little different from those of the more established in Beijing or Shanghai.

The VM Group said China's official policy was to raise up and not to level down the social and economic wealth of the whole nation.

For commodities, this implied an extended run of growing demand during which financial crises that cause supply-side threats, would in retrospect be little more than a glitch.

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