SHANGHAI: China's cooling economic growth will cap gains in commodities prices and temper the roaring earnings performance of mining companies. But easier credit and fresh spending on infrastructure will likely drive a strong medium-term outlook.
Soft manufacturing data last week coupled with warnings about economic risks by two of China's most influential government think-tanks have shaken confidence in the strength of commodities demand in the world's No. 2 economy, hammering miners' shares and pulling oil and base metals prices lower.
Beijing has lowered its 2012 growth target to 7.5 percent and is retooling the economy to focus on domestic demand and away from exports. The lower target may mean the end of a run of often double-digit annual demand growth for commodities which has strained global supply chains of everything from oil to cotton.
A slower growth rate in what is now a much larger economy than it was a decade ago still calls for big additional volumes of raw materials every year, and many analysts say there is little reason for the pessimism in some markets since China's target growth rate was revised. China's economy often exceeds the target, and Beijing still has plenty of options to stimulate growth if they economy falters.
"These are short-term risks. Beijing is likely to intervene to stimulate the economy over the coming months and that will support miners in the medium term," said Jonathan Stubbs, a London-based strategist at Citigroup.
"The shift in focus to consumption means there is going to be less support from China for rising commodity prices. So mining companies will have to 'sweat' their assets and make them work harder to enjoy out-performance."
Top global mining companies such as BHP Billiton, Rio Tinto, Anglo American and Xstrata, reported large, but modestly weaker, half-year profits and said they were keeping their billions in cash to chase deals.
Commodities prices, such as copper and iron ore, are already trading at the upper end of the forecast ranges of many analysts, with room for upside in the second half if China's economy rebounds.
Many miners also seem unfazed; with some warning that even at a more sedate single-digit growth rate, they will still struggle to find the additional millions of tonnes to feed China.
"China is still the future for miners. It's a command economy and I can assure you it will be commanded to grow. It's currently engineering a very attractive soft landing. Don't let anybody freak you out," Robert Friedland, CEO of Ivanhoe Mines said at a mining conference last week.