As the global mining sector basks in sky-high commodity prices, surging profits and a return to the go-go deal-making days of 2007, its biggest customer is struggling against a powerful enemy threatening to derail the rebound.
China's rip-roaring economy and its seemingly insatiable demand for raw materials has vaulted many mining firms back to pre-recession-era profit levels. But the country's policy makers are now scrambling to contain inflation and a real estate bubble that could sap demand for metals just as commodity producers are beginning to spend again.
On the final day of celebrations of the Lunar New Year holiday, China's central bank announced it was raising interest rates for the third time in four months. The 25-basis-point rate hike, unveiled Tuesday, follows a series of increases in Chinese banks' reserve ratio requirements and strict housing purchase restrictions aimed at countering rising prices, continued loose lending practices and a runaway real estate market.
Despite a string of recent spending announcements and acquisitions by major mining companies such as Xstrata PLC, Rio Tinto PLC and BHP Billiton Ltd. , the outlook for metal prices and Chinese demand in the Year of the Rabbit is anything but clear.
"The tightening measures are intensifying," said Na Liu, a widely followed China strategist and commodity expert who is the founder of CNC Asset Management and an adviser on China strategy to Scotia Capital.
Mr. Liu, a long-time commodity bull, is currently cautious on the raw materials sector.
"For the time being, there is a lot of uncertainty," he said.
China is approaching what is traditionally the strongest period of the year for manufacturing and construction activity. Just how Chinese steel makers, manufacturing and construction companies react to the tightening conditions during March and April is expected to be a key indication of commodity demand for the rest of the year.
"You have these two countervailing forces fighting against each other. It will be interesting to see how the seasonality strength plays out this year amid the very strong tightening measures," Mr. Liu said.
Yet while China and other booming Asian countries are implementing policy measures to counter rising inflation, foreign capital inflows and potential asset bubbles, the world's mining firms are unveiling bullish forecasts, boosting dividends and ramping up spending plans that were halted during the global financial crisis.
In 2008, Rio Tinto iced an $800-million (U.S.) expansion of its Iron Ore Company of Canada operations in Labrador in response to the global financial crisis. On Tuesday, it announced a $163-million investment in the operations that were in addition to a $235-million investment announced in May, 2010.
Miners have gained the most from China's explosive growth over the past year as demand for copper, and the iron ore and coal used in steelmaking, helped pull many companies out of the recession and into a full-speed recovery faster than many expected.
On Tuesday, Vancouver-based Teck Resources Ltd. reported record revenue for the both the fourth quarter and all of last year, lifted by rising prices for coal and copper – its key commodities.
The miner said sales rose about 20 per cent to $9.3-billion last year, compared with $7.7-billion in 2009. Fourth-quarter revenue was $2.8-billion, up from about $2.2-billion for the year-earlier period.
Also on Tuesday, Swiss-based miner Xstrata PLC reported an 86-per-cent jump in annual profit, in large part due to rising copper and coal prices.
Rio Tinto and BHP are also expected to report a surge in profits when their earnings reports come out this week and next, respectively, which has some investors expecting returns in cash through increased dividends and share buybacks.
For now, despite China's decision to tap the breaks on its growth through another interest rate increases and other measures, miners are expected to continue to profit in the near future.
"The mining sector is a net beneficiary of some Chinese pain," BMO Nesbit Burns analyst Tony Robson said.