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ANALYSIS: China's demand for metals fuels mining sector


The mining sector's value, while hit by fears of a global economic slowdown, has a bright future thanks to strong Chinese demand for metals and the difficulty of unearthing resources in Africa, analysts say.

"It is not as rosy as 12 month ago but we remain bullish on the mining sector," RBC Capital Markets analyst Des Kilalea told the Mines and Money conference in London last week.

Delegates from the mining and banking industries attending the event agreed that the so-called "super-cycle" begun in 2002, which has seen the price of copper soar five-fold in five years, is far from over.

One major reason for this is strong demand for metals from China and other nations with roaring economies, such as India, Brazil and Russia.

"We still much believe in the Chinese growth story," Kilalea said.

Amid unprecedented demand for metals -- including aluminium, gold and nickel -- from emerging economies, the world's largest miner BHP Billiton is seeking to buy its biggest rival Rio Tinto.

BHP has hinted at launching a hostile takeover bid for its Anglo-Australian peer after Rio Tinto turned down a bid worth US$153 billion earlier this month.

The mining sector, meanwhile, must overcome fears of a slowdown to US economic growth, which would likely dent demand for metals and other commodities.

"Investors have less capital to play with and are more cautious about where that capital is now employed," said Judith Mosely, head of mining analysis at Societe Generale.

Some analysts have however brushed aside fears of slower economic growth in the US, the world's biggest economy.

The US Federal Reserve last week slashed its outlook for next year's US economic growth owing to rising oil prices and the US housing crisis which has caused a global credit squeeze.

"The credit crunch is a short-term phenomenon," Michael Lynch-Bell, a mining expert at Ernst & Young, told the London mining conference.

Analysts could paint a positive picture for the mining sector's demand outlook but regarding output, prospects appear less healthy which in turn is supportive for prices.

Giant mines exploited in the 1960s are reaching their production peak and the rate at which new mines are discovered is slowing.

Meanwhile, the operation of new mines is often difficult because of the high costs involved, technological obstacles and geopolitical tensions in countries where metals are found.

Ed Flood, managing director of Haywood Securities, said the mining industry was "very close" to its production peak after which point the production of metals would decline.

Flood said that such a scenario was evident in copper kingpin Chile.

Analysts meanwhile said that it was up to Africa to help support greater output.

"Africa hosts about 30 percent of the world's mineral resources," said Thys Teerblanche, head of Mining and Metals at Standard Bank.

But he said they were "relatively underexplored and underexploited," except in South Africa. Reasons for this include political instability, the spread of AIDS and a lack of infrastructure in many African countries.

The difficulty of extracting metals in Africa reduces the chances of big increases in supplies and therefore supports prices, analysts said.

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