Market taking ‘short-term’ view on resources

The resources sector is likely to be a mixed bag in the near future but the long-term drivers supporting it are still there, according to a fund manager who specialises in the sector.

Monday, October 29th 2012, 6:44AM

by Niko Kloeten

Pengana Capital head of resources Ric Ronge, who will be speaking at this week’s Meet the Managers forum, said the resources sector is a cyclical and often volatile market.

However, he said there are five key themes - some on the demand side and some on the supply side - that will underpin the market for hard commodities such as iron ore and copper over the next few years.

The first, he said, is the combination of industrialisation and urbanisation taking place in fast-growing developing economies around the world including the two most populous countries, China and India.

Speaking of China, Ronge said its predicted ‘slowdown’ won’t have the big impact on demand for minerals some are predicting.

“Slower growth on a bigger base is still very meaningful. If China grows at 7.5% a year for the next 10 years it will add $6 trillion, compared to the last 10 years at closer to 9%-plus when it grew by $4 billion.”

One themes closely linked to the first one is population growth: “The world will be adding more than one billion people over the next 20 years; that’s a bit like building 700 Aucklands,” he said.

The growth of consumerism in developing countries is another theme; for instance Ronge said Chinese wages are on average four times higher in the cities than in rural areas. Every 2.3 seconds a car is sold in China.

On the supply side Ronge said there are two factors that will support the mineral sector: the lack of supply (one-third of the forecast copper market for 2025 can’t be located) and the comparatively low quality of the mineral deposits that are left.

“A rational economic entity like a miner will treat the most profitable part first. If you cherry-pick the deposits you’re lift with the low-grade stuff.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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