China is reigniting the mining sector with its near double-digit economic growth, working through inventories and triggering a rebound in commodity prices that is inspiring a new round of deal-making in the industry.
The world's largest commodities consumer reported robust second-quarter growth of 9.5 per cent on Wednesday, surpassing expectations and helping send both stock markets and metal prices higher.
Copper, considered an indicator of global economic activity, slumped below $4 (U.S.) a pound in May amid widespread worries that China's moves to tackle inflation could derail the country's breakneck growth. But copper prices have rebounded sharply, reaching $4.40 Wednesday and closing in on the record $4.62 reached in mid-February, as the Asian superpower confounds skeptics.
China's latest growth figures "should dampen fears that the economy is heading into a hard landing and they suggest that policy makers can afford to stay focused on tackling inflation for a while longer," said Mark Williams, senior China economist at Capital Economics. That is expected to keep driving demand for commodities used to help build infrastructure and everyday goods such as appliances and automobiles.
Chinese copper production hit record levels in June, and imports are climbing as its factories devour existing inventories.
"The statistics also point to a pick-up in demand for copper following months of imports falling down," said Patricia Mohr, vice-president of economics and a commodities specialist at Scotia Capital.
"Fabricators in China have been working off inventory on hand in reaction to tightening credit conditions. They actually liquidated a lot of their stocks, and the imports again rose in June, and I believe, the liquidation is more or less over in China."
While base-metal prices bounce back, renewed debt worries in Europe are driving up the price of gold, which hit a new intraday high of $1,588.90 an ounce in New York on Wednesday.
Higher prices and strong demand are propelling mining companies to seek growth through mergers and acquisitions, particularly after a lull in late spring when values dropped.
On Wednesday, Northgate Minerals Corp. said it would buy Primero Mining Corp. in a deal the companies valued at $370-million (Canadian) to create a mid-tier gold producer with mines in Mexico and Australia and a gold development project in Ontario.
Joe Conway, chief executive officer of Primero who will head the combined company, said he plans to aggressively expand the new entity to capitalize on the metal's growing image as a safe-haven currency.
"We think the commodity will continue to rise as long as there is financial uncertainty," he said.
Also Wednesday, South Korean steel-making giant POSCO said it will take a 20-per-cent stake in Fortune Minerals Ltd. 's Mount Klappan coal project in British Columbia, for a total investment of about $181-million.
More steel makers are looking to secure their own supply of coal, which was evident earlier this week when ArcelorMittal SA joined Peabody Energy to buy Australia's Macarthur Coal Ltd. for $5-billion.
Through acquisitions such as these, miners are betting on strong and steady demand from fast-growing nations such as China and India.
China's growth in the April-June quarter, down a smidgen from 9.7 per cent in the first quarter, came as a surprise to some given that other recent economic indicators suggested the economy may be slowing. While China's second-quarter growth is still considered strong, it was the slowest pace since the third quarter of 2009 when the global economy was coming out of a recession.
Mr. Williams of Capital Economics notes China's second-quarter growth came despite falling consumer spending and an expanding trade surplus. "Growth in China is being achieved partly at the expense of growth in the rest of the world," he said in a research note. "The sensible response is probably to remain cautious."