Upbeat Mining CEO Soothes China Economy Fears

Global mining stocks railed in London after Rio Tinto CEO Jean-Sebastien Jacques suggested prices for mineral commodities such as iron ore and copper may have bottomed out.

There’s a tight relationship between the outlook for the global economy and the resources sector, both which are largely influenced by China’s ability to engineer a soft landing as it transitions to a consumption-based economy.

“The drop that we had experienced for the last two or three years in terms of activity in China seems to have plateaued,” Jacques told Bloomberg in an interview. “We are becoming much more what I would describe as cautiously optimistic in relation to China.”

The head of the world’s second-biggest miner behind BHP Billiton visited China two weeks ago and said his optimism was based on conversations with customers, partners, suppliers and Chinese government officials. Housing inventories have dropped in a “very material way” he said, perhaps preceding greater demand for building materials.

Chinese officials are also becoming increasingly confident about energy consumption, railway capacity utilization and export data, he said.

Moody’s upgrades price outlook
Josh Mahony, a London-based market analyst at broker IG, said a plethora of mining stocks had risen amid indications the Chinese economy had reached an “inflection point”.

“Comments from Jacques served to solidify the growing feeling that we may have seen a bottom for commodity prices, as Chinese data shows signs of improvement and Moody’s upgraded their base metals view from negative to stable,” Mahony said.

Ratings agency Moody’s Investors Service said its upgrade reflected an expectation that prices for aluminum, copper, nickel and zinc are unlikely to deteriorate further over the medium term. Market conditions, however, will remain testy until at least 2018, it added.

“Stimulus measures from the Chinese government, including easing of credit—reducing reserve requirements—and increasing infrastructure spending have helped offset the country’s decelerating GDP trajectory,” Moody’s Senior Vice President Carol Cowan said.

To be sure, China’s economy is partly being propped up by debt, which the Bank of International Settlements warned on Sunday has reached alarming levels.

Data released today pointing to a six-year high in Chinese house-price growth comes off the back of positive investment, factory output and retail sales figures for August, IG’s Mahony said. “Despite improving data, the key question is whether such improvements are merely stimulus driven, and as such, unsustainable over the long term.”