China: world's most demanded big mining stocks

Amid today's sharp profit taking in China's bubble-like equity markets, runaway Chinese mining stocks take a bit of a beating.

JOHANNESBURG - - 

The Shanghai Composite index took a 5% beating, by the close, on Wednesday, after contracting by as much as 7.7% intra-day, on fears that China's central bank may tighten its lending policies, motivated, it has been speculated, by the need to rein in bubble-like conditions in the country's stockmarkets. Since mid-July, in particular, the levels of Chinese stock indices have exploded, making fresh 12-month highs hour after hour during each ensuing trading session.

The broader-based CSI 300, from China Securities Index Co., also finished the day down, by 5.5%. The contractions in Chinese indices did little, however, to detract from the continuing lofty value of many Chinese stocks. Petrochina has ranked as the world's biggest stock, by market value, for some time, at USD 361bn, despite its demonstrably smaller underlying metrics compared to the world's No 2 stock by value, Exxon Mobil, valued at USD 351bn.

Chinese banking stocks lead the world in terms of market value, with China Construction Bank at the top (USD 210bn), followed by the likes of ICBC (USD 190bn). Of the world's 30 most in-demand big mining stocks, 20 hail from China, and India, where stockmarkets have also roared ahead; the balance comprise Australian coal miner New Hope, Polish copper-silver digger, KGHM Polska Miedź, uranium specialist ERA, copper miner Antofagasta, gold miners Kinross Gold, Iamgold, Goldcorp, Eldorado, oil sands miner Petro-Canada, and copper-gold miner First Quantum.

Chinese stocks have moved increasingly higher despite clear evidence of earnings pressure, when a corporate entity is exposed to international prices. On Wednesday, Jiangxi Copper, an in-demand big mining stock, announced that the net profit attributable to shareholders for the period from January 2009 to June 2009 is expected to decrease by 57% to 64%, compared with the same period of last year; the stock price declined by 9%. At the same time, commodity and metal prices are mostly on the mend, many from the latter stages of 2008. Copper prices have doubled from lows seen in December 2008.

Volatile Chinese stockmarkets, measured by the China index maintained by MSCI Barra, previously peaked in October 2007, when the stocks index went above 100 points, having risen from a base of under 30 points at the beginning of 2006. The index then fell to below 30 points in the aftermath of global stock markets turmoil triggered by the bankruptcy of Lehman Bros., an erstwhile Wall Street investment bank. Since then, the MSCI Barra index for Chinese stocks has doubled to more than 60 points.

From within China, analysts and indeed policymakers have recently raised increasing concerns over rising domestic inflation. New yuan loans during the first half of 2009 aggregated CNY 7.4 trillion (USD 1.08 trillion), roughly equal to about half of China's gross domestic product for the period. Appeals for the central bank to rein in lending has, however, done little to impress The People's Bank of China, which has maintained a somewhat loose stance in its monetary policy, remaining focused on promoting  growth in what is now the world's No 3 economy, and the world's fastest-growing economy of any size.

Underlying demand for Chinese equities remains relatively firm. Wednesday's trade in Chinese stock markets saw the successful initial public offer (IPO), and the world's biggest to date, from China State Construction Engineering Corp. Cement maker BBMG also jumped on its debut.

While the high value of Chinese stocks would normally be associated with increased levels of merger and acquisitions activity, the uproar over the recent arrest of certain Rio Tinto officials within China in connection with iron ore pricing negotiations has thrown the proverbial spanner in the works. In early June, BHP Billiton and Rio Tinto, No 3 and No 2 in the global seaborne iron ore trade, announced that BHP Billiton would pay Rio Tinto USD 5.8bn "for equity type interests at financial close" to take its interest in the two companies' Pilbara, Australia iron ore joint venture from 45% to 50%. This values the full joint venture at USD 116bn, more than the market value of any mining company in the world, bar BHP Billiton.

The iron ore joint venture shortly followed Rio Tinto's abandonment of its posed near-USD 20bn capital injection from smaller rival China State-owned Chinalco, replaced by the announcement of a general rights issue to raise the equivalent of USD 15.2bn, and the deal with BHP Billiton. Unlisted Chinalco, a Chinese state enterprise, with stakes in listed Chalco and Jiangxi Copper, represented China's biggest attempt yet to spread its mining wings abroad.

Chinese miners have achieved fewer successes in offshore expansion than could otherwise have been the case; one success was the recent taking up of a stake in Australia's Fortescue, the new kid on the seaborne iron ore block. At home, however, China ranks high, globally, in a good number of mining sectors. China has indeed long ranked as simply big in global resources, and today ranks No 1 as a consumer of any number of raw materials, aggregating about a third of global demand.

China today ranks as the world's leading producer of coal, iron ore, gold, aluminum, antimony, barite, bismuth, fluorspar, graphite, lead, phosphate rock, rare earths, talc, tin, tungsten, and zinc. It is also global No 1 in pig iron and crude steel. China also ranks among the top three countries globally in the production of many other mineral commodities, such as molybdenum, titanium, salt, and sulfuric acid.

China ranks as the world's leading exporter of antimony, barite, coal, fluorspar, graphite, rare earths, and tungsten. There are opportunities for outsiders where China's demand exceeds supply: iron ore, copper, bauxite, chromium, cobalt, manganese, nickel, lead, potash, and, of course, oil.

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