After blogging about inflation measures and mining company performance iseparately n the last few days, I saw this Reuters story that brought together the two themes. In fact this article synthesises numerous business and economics topics, revealing the inter-connectedness of the subjects. It’s helpful sometimes to reflect on a case that illustrates that no topic exists in isolation. On the contrary, a real-world example often enables connections to be made between seemingly remote themes. So here we have mining giants BHP Billiton the so-called ‘Big Australian’ firm and Rio Tinto, a British-Australian company, featuring in an article which draws together inflationary pressures in China, the economic impact of the earthquake and tsunami in Japan and global supply chains. Let’s take the conditions in China first: The world’s biggest consumer of commodities, China has had a voracious appetite for metals, used in infrastructure development, engineering and construction to power its double-digit economic growth. It used to be said that when America sneezes, the world gets a cold, but what if China develops flu-like symptoms?
China is the world’s biggest consumer of commodities, accounting for 40% of global copper demand, according to the Reuters article. But it is the largest producer of commodities too, conferring on China a power that it is starting to exploit in some markets, notably in rare earth metals. China's authorities have been trying to cool down the country's overheating economy in recent months, with three interest rate rises and increases in bank reserve requirements. This tighter monetary policy stance, brought in as China faces an inflation rate nearing 5%, has led to price falls in several key commodity markets: iron ore and copper in particular.
Analysts are fairly calm about the prospect of slower growth in China’s economy, though. They feel that action taken by the country’s monetary authorities is a sign of economic strength. If the measures work, growth will be more sustainable, which is a good sign for world markets. But in the meantime, the performance of the big mining companies is declining as a result of China tightening. This scenario is likely to turn around as global stockpiles of iron ore and copper are depleted and industrial consumers return to the markets.
A different picture is clear in Japan, though, of course. In addition to the almost unimaginable loss of human life, the catastrophic disasters there have had a severe impact on economic production, which affects us all because of Japan’s status as a major global trading power. Supply chain disruption has a big impact on Japanese manufacturing. The effects on the car and electronics industries, two of Japan’s largest sectors, are well outlined here. Global impacts are also being experienced, with Japanese-made components unable to be supplied to foreign companies and subsidiaries.
When the rebuilding operation begins, and it will be a massive task of course, other effects will be seen. Mining industry observers forecast a big surge in demand for iron ore, copper and steel, which will no doubt cause price rises in many commodities.
Tragedy, natural disaster, economic management, global supply chains and commodity demand and supply: all in the spotlight of this truly global case study.