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A labourer uses a stick to arrange newly produced reinforcing steel rings at a steel and iron factory in Shanxi province in this photo taken in March. In China, the consumption of raw materials by exporters is giving way to rising domestic demand.

STRINGER/CHINA/Reuters

From the FT's Lex blog



Commodities gave global equities a run for their money in the first quarter of the year - but have flagged since. Standard & Poor's GSCI Spot Index of raw materials is down 12 per cent from its February peak. Rightly or wrongly, investors treat commodities as a homogeneous group - hence the broad sell-off in resources stocks. But the demand dynamics vary.

The oil price has slipped on lower U.S. and European consumption and easing geopolitical stress. Meanwhile, iron ore demand has moderated as export-led growth in Asia adjusts to the slowdown in developed economies, but underlying demand is still strong. In China, the consumption of raw materials by exporters is giving way to rising domestic demand. China's output will still grow far faster than most developed economies, but at a more modest clip in the high single-digits.

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And resources companies will grab a slice of that, thanks very much. After being caught out by the Asian tigers' growth spurt at the turn of the century, they have invested hard in new low-cost, long-life capacity. Sure, miners accept that China will not buy commodities at the current pace forever. So steel intensity will peak as China's infrastructure development reaches maturity, and be replaced by higher demand for other commodities such as potash. China accounts for under a fifth of global potash demand now, but more than half of iron ore demand.



So miners must refine investment calls. Last week, BHP Billiton said it was easing capital expenditure. In February, a year into its $80-billion five-year capex target, it talked of living within its means. Fair enough: the iron ore price is down nearly 30 per cent since BHP set that target. Rio Tinto could also moderate capex.



Investors in turn expect higher payouts. But the cycle is not over so much as changing; demand for one commodity will peak, and kick in for another. Thus the choice is more between diversified miners such as BHP, and single product miners such as potash producer UralKali. It is wrong for investors to universally demand their money back just yet.

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