China announced industrial production data for October today (Friday), showing industrial value-added up 9.6% year-on-year, up from 9.2% in September and 8.9% in August.
This is great news for mining companies.
"Data out today provides convincing evidence that the modest macro recovery we've been anticipating is well underway," wrote Shanghai-based Andy Rothman, China Macro Strategist for CLSA Asia-Pacific Markets. "Industrial value-added, power generation, retail sales and new home sales all improved in October, while inflation remains so low that it is not a policy factor."
Infrastructure investment in October was up 24.9% year-on-year, continuing the rebound begun in September.
Rothman explained, "…this infrastructure rebound is the result of the government fixing approval and financing bottlenecks for projects originally scheduled to be built this year, not due to a stimulus."
Looking at prices, industrial input prices fell by 1.7% year-on-year in October, an improvement from the 4.1% decline seen in September.
"We are starting to see a bit of a bump up in both input and output prices, which is consistent with our view that the growth rate of industrial inventory levels has slowed and a modest macro recovery is underway," Rothman concluded.
This has led some economists to believe that this increase in industrial production in China will be positive for commodity prices, including Li-Gang Liu and Hao Zhou who work for Australian bank ANZ.
If this is the case, it'll benefit the global "mega miners" that have seen their share prices tumble since the slowdown in China began back in 2011.
Mining Companies That Benefit from China Demand
BHP Billiton (NYSE: BHP), based in Australia, is the world's largest mining company and sells iron ore, base metals, potash, aluminum, metallurgical coal, thermal coal, manganese and oil products to China.
BHP is China's third-largest supplier of iron ore where growing stockpiles in China due to sluggish production had undermined pricing.
But this is starting to change.
Frik Els, writing for mining.com said, "Today's import price for 62% fines at China's Tianjin port of $121.40 is also a 40% improvement since the commodity sunk to a three-and-a-half year low of $86.70 in September." Els continued, "BHP said its 2012 iron ore production will exceed 160 million tonnes. The company's iron ore production for its 2014-2015 fiscal year is expected to be around 220 million tonnes."
Els also points out that steel orders in China were up by 14% during October.
Another big iron ore miner is Brazil-based Vale SA (NYSE ADR: VALE). Vale sells raw iron ore to China where it operates two pelletizing plants. In addition, Vale sells nickel and manganese to China.
As industrial production rises and stockpiles are drawn down, demand for Vale's iron ore, nickel, copper and coal products can be expected to rise.
Rio Tinto plc (NYSE: RIO) produces iron ore, aluminum, copper and coal as well as industrial salt, uranium, and diamonds. Rio Tinto believes that the trend toward urbanization in China will continue to drive demand for steel. Management remains positive of the long-term growth prospects for mining products demand in China despite recent short-term weakness.
In addition to the increase in industrial production announced today, Reuters reported that China's State Reserves Bureau may start a new round of purchasing for the country's strategic stockpiles.
"Sources told Reuters this week that China's influential state planner could revive a stockpiling plan as soon as this month to buy around 400,000 tonnes of primary aluminium ingots and 165,000 tonnes of refined copper cathode for state reserves," the report said.
Reuters also reported that copper and aluminum inventories have nearly doubled since 2011: "A sales manager at a Chinese copper smelter said the purchases could signal the domestic market that prices had bottomed, encouraging speculators and end-users to build stocks."
BHP, VALE and RIO have all fallen sharply since June 2011. If today's industrial production numbers really do signal that the recovery of China's economy has begun, then these mining companies could be well placed for a significant rally in 2013.
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