Interview with: Michael Pettis, Finance Professor, Peking University’s Guanghua School of Management, a speaker at the marcus evans Mining Technology and Operations Summit 2013, on the global commodities market.

1. Interview with: Michael Pettis,
F i n a n c e P r o f e s s o r , P e k i n g
University’s Guanghua School of
Management
“The great growth in the demand for
commodities has exhausted itself, so we
are going to see a significant reduction
in demand and prices,” says Michael
Pettis, Finance Professor, Peking
University’s Guanghua School of
Management. “This has all sorts of
implications for mining organizations,”
he points out.
A speaker at the marcus evans Mining
Technology and Operations Summit
2013, in Perth, Australia, 18 - 19
November, Pettis digs deep into the
global commodities market and shares
his predictions for the future.
What are your projections for the
global demand for commodities?
What macroeconomic factors should
mining leaders bear in mind?
The most important change in the last
decade has been the surge in Chinese
demand. China is around 12 per cent of
the world’s economy, but it consumes
40 per cent of global copper and 60 per
cent of global iron. This disproportionate
consumption has been almost
completely driven by investments into
building offices, apartments, bridges,
hig hw ay s , r ai lr o ad s, air p o r ts,
manufacturing capacity, and so on, at
an astonishing rate.
This was good in the 80s and 90s as
C hina desper ately lack ed the
infrastructure, but when countries follow
such growth models, and there have
been many investment-driven growth
miracles in the last 100 years, they
have always ended up with a significant
debt problem. Overinvestment resulted
in a tremendous surge in demand for
hard commodities and created an
incredibly unbalanced economy.
The good news is the Chinese leadership
is determined to rebalance the
economy. The bad news for commodity
exporters is that as China rebalances its
economy towards a greater alliance to
consumption, it will no longer purchase
a disproportionate amount of the
world’s commodities. The global
demand for hard commodities is going
to drop very significantly. Commodity
prices have a long way to go until they
bottom out.
Along with the fundamental demand for
the commodities, there is a second
story going on. Due to constraints
within the banking system, the least
efficient users of credit have unlimited
access to credit while everyone else has
limited access to very high interest
rates.
To get around lending restrictions,
companies have been accumulating
stockpiles of commodities. Not because
they need them, but because they could
get external financing to import them
into China and domestic financing
against the inventory. This has resulted
in a build-up of inventory in China and
distorted the market.
How will this impact mining
companies?
There is going to be an increase in
supply, as most mining companies were
late to increase capacity. Commodity
prices started rising in 2002, but there
was no significant increase in capacity
until three or four years later. Demand
is going to drop sharply.
In this environment, the most
conservative and tight balance sheets
are the best. Commodity prices have
fluctuated throughout history, so there
is no reason to assume that those days
are over. We are at the very high end of
commodity prices now, and I believe we
will test the low ends within a few
years. We should watch China very
closely to see how it rebalances its
economy.
Could other countries, such as
India, fill in that gap?
India has needed infrastructure
investment since its independence in
1947. There is no evidence that it is
about to embark on the kind of
investment binge that China has done.
India’s economy is a little more than
half the size of China’s, so it could not
replace that demand anyhow.
Any final thoughts?
Historically, when there is a contraction
in demand the least leveraged
companies gain market share, and when
there is growth, the most leveraged
companies gain market share. I would
say we are moving into a different
environment now, where the most
boring and safest balance sheets will
outperform.
Demand
is going
to drop
sharply
Digging into the Commodities Market

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