Why Death of Commodities Is ‘Greatly Exaggerated’

Prices of commodities such as copper and oil have slumped about 15 percent this year as investors shun risk assets and demand fell amid a moribund global economy, but a demise of the mining industry is “greatly exaggerated,” says HSBC.

A driver inspects an earth mover at Fortescue Metals Group Ltd.'s Cloudbreak iron ore operation in the Pilbara region of Western Australia.
Bloomberg | Getty Images
A driver inspects an earth mover at Fortescue Metals Group Ltd.'s Cloudbreak iron ore operation in the Pilbara region of Western Australia.

“To paraphrase Mark Twain, reports of the mining boom’s death are greatly exaggerated,” HSBC’s economists Bloxham and Hartigan wrote in a report on Thursday. “True, commodity prices have peaked. But there is still substantial investment yet to be completed. Plus, resource exports are yet to ramp up as a result of the added capacity that has been built.”

This new investment should provide support for global mining, including in Australia, where investment in the industry will contribute about 10 percent to GDP by 2013, up from just 4 percent in 2010, a sign that “the mining boom is not over,” HSBC said.

Metal prices have declined year to date as investors, spooked by worries that Europe’s two–year debt crisis will worsen and China’s economy will grind to a halt. Copper, , used in industries including autos, construction and consumer electronics, has declined about 15 percent this year and is now trading at $3.3935 per pound while iron ore, the main material in steel, has plunged to a nine-month low of $118.60 a metric ton.

Spot gold has fallen about 16 percent since touching an all-time high of $1,918 in September last year, and slipped about 0.1 percent to $1,613.50 an ounce in early Asian trade on Friday.

Analysts say an economic recovery in the second half for China, the world’s biggest consumer of natural resources, should help boost investment in the sector and exports should pick up. This week alone, China’s biggest oil firms Sinopec and CNOOC announced major acquisition deals involving assets in the North Sea, even as Brent is down 5 percent for the year and Nymex crude has fallen 12 percent.

Sinopec is paying $1.5 billion for a 49 percent stake in Talisman Energy’s North Sea business and CNOOC is proposing to take control of Canada’s Nexen Energy in a $15 billion acquisition.

“I think China looks to that long term play as evidenced by the bids they've got for North sea oil production,” Jonathan Barratt, Founder and Editor of investment newsletter Barratt's Bulletin, told CNBC Asia’s “Squawk Box” on Friday. “So I think at the end of the day, the China story is still there, and we are certainly seeing demand. So I still see a good feel, good story.”

HSBC’s and Barratt’s views are counter to those of other commodity traders, who expect prices to be weak for the foreseeable future. Dominic Schnider, Head of Commodity Research at UBS Wealth Management told CNBC this week that global demand, which continues to be the key driver of the natural resources sector, shows no sign of picking up.

Andrew Su, CEO of Compass Markets, a Sydney-based commodity broker, said he has been forecasting weakness in commodities since the beginning of the year and does not expect the selling to stop any time soon.

Trina Chen, Research Analyst with Credit Suisse in Hong Kong, is not as pessimistic about China’s demand for metals. She singled out copper in a report this week, predicting that the country’s demand can potentially grow by 50 percent to 8.5 kilograms per person from the current levels of 5.6 kilograms.

“We think the long-term outlook on Chinese copper demand is not as bearish as perceived, with growth to be driven by continued expansion in manufacturing activity and higher intensity of copper usage by consumers,” Chen said. This long-term growth of Chinese copper demand will be underpinned by home appliances, transport, and manufacturing sectors, she said.

- By CNBC's Jean Chua.