China and Commodities

While China's continuing rapid growth may not be entirely good news for its direct competitors, given China's relative shortage of raw materials one clear net beneficiary should be the commodities sector.

Global miner Rio Tinto says it's cautious about the strength and pace of the world's economic recovery. Chairman Sir Robert Wilson told shareholders he was hesitant to forecast when the improvement in demand and prices would occur. "As far as the outlook is concerned, forecasts are obviously clouded by the uncertain economic and political consequences of the war in Iraq," Sir Robert said."However, even leaving aside the war, it is difficult to see what might cause significant improvement in the main economies of the OECD (Organisation for Economic Cooperation and Development) in the near term."

The metal industry was likely to have an earlier recovery than other industries, with China's impressive performance driving the market, Sir Robert said. While other industries and companies were threatened by China's competitive advantages, Rio Tinto was able to supply raw materials needed for production in the country. "In many sectors of industry, China's growth represents a threat," he told the meeting. "The increasing use of modern technology, combined with its very low labour costs, is establishing a competitive advantage for China. "But in most instances it lacks the raw materials to support this growth."Comparative advantage in the production of many of these requirements therefore lies outside China, with suppliers such as Rio Tinto." But while a Rio Tinto was well set up to take advantage of a recovery, it was difficult to predict when it would come, Sir Robert said. He said a volatility in the foreign exchange markets was adding an element of uncertainty to the near term outlook. "I hesitate to forecast when we will see a major improvement in overall demand and prices. "Other than for iron ore, it will probably not be this year," he said.
Source: The Age
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