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The financial media has hammered home the theme that the global economic slowdown will persist for awhile. Given the sobering state of Europe, as well as what has been a sluggish though improving recovery in the US, it makes sense. The other corollary to the global slowdown has been the emphasis on China’s slowed economy. As readers might guess, though, there’s more to the China story than that facile analysis. One of the areas to watch closely is the natural resource and commodities area, and the picture there isn’t so simple.

When the earnings season kicked off back in January with Alcoa reporting disappointing results, investors focused on the company’s fourth quarter loss but dismissed Alcoa’s stronger stated outlook for 2012. Since then, analysts have focused on the global oversupply of aluminum and the considerable headwinds in front of the industry. More recently, the concern has been that Chinese aluminum firms will be facing overcapacity this year and, by some analyses, for years to come. Aluminum Corp of China (NYSE: ACH), known as Chalco, though, has pointed instead to a better outlook of conservatively upwards of 5% industry growth for 2012 in China. And if you look more closely at what Alcoa’s management maintains, it still sees 12% growth in its China operations, which account for 45% of Alcoa’s total sales.

Shanghai Aluminum Spot 1 Year & Shanghai Aluminum Inventory 2 Year

Other Metals

The aluminum industry was seen as the weakest of the metals industries, so the prospects were held brighter for copper, zinc, nickel and others. Two international names, Freeport McMoran (NYSE: FCX) and Southern Copper (NYSE: SCCO) are strong players. Freeport was able to show strong results even in a year where spot copper prices fell on the Comex from $4.50/lb. to nearly $3.00, though they have since rebounded to around $3.75. Copper, particularly, came into focus when Chinese company Minmetals Resources (1208.HK), which is a 72% state owned enterprise, successfully bid $1.3 billion for Canada’s African-based copper miner, Anvil Mining (AVM.TO). Minmetals, which already has other holdings in Asia and Australia, earlier missed out on its $6.6 billion bid for Canada’s Equinox Minerals, which was snapped up by Barrick Gold (NYSE: ABX). Minmetals covets copper mines in Africa, which both Equinox and Anvil have. Anvil’s Kinsevere Mine in the Democratic Republic of the Congo has an annual projected output of 60,000 tonnes of copper cathode.

Comex Copper 1 Year Chart

Expansion Strategy

Although Minmetals was unsuccessful in its bid for Equinox, its Anvil acquisition will not be its only deal, according to Minmetals’ plan. The company has a goal for metals acquisitions of as much as $7 billion. These attempts by Minmetals are to dramatically expand its asset base by as much as threefold or fivefold, include considering the pursuit of other assets in the African copper belt. China accounts for roughly 40% of copper consumption globally, and other industry observers concur with Chalco’s projected industry growth for China in 2012 at 5% or slightly higher.

Minmetals, Shanghai Composite, S & P 500 5 Yr. Chart

Asset Expansion

There are a couple of things operating with analyses regarding China right now. The concept of its economy slowing is a highly relative one, with the emphasis on most data factoring in how necessary the 9% or 10% GDP growth was to spur the global economy at large. Except for the most dire predictions, even conservative analysis sees 8% GDP growth, or perhaps as low as 7.5% GDP in China for 2012. Although the steel, power and aluminum industries, for example, are showing some temporary contraction, the amount of resources required for China’s usage are still vast. And there is growth in the offing, both cyclical and secular, as the copper and aluminum forecasts project.

Thus you are seeing the outreach of Chinese oil, gas and resource companies such as coal and metals miners to try to acquire assets. We have written on this theme before, because it is important, recurrent, and likely to be persistent. These much sought after commodities are the natural resources China needs to run its growing industrial engine and its expanding economy. This is going to remain an important macro theme for China, with the micro theme spotlighting specific industries and companies. Minmetals is part of a crucial China-wide thrust to build up a stronger natural resource asset base for growth. Investors should remain aware of this.

Committed to your Global Profits,

Jim Trippon
Chief Investment Analyst