China Metals Companies Lead Stock Rally

Includes: BHP, RIO, VALE
by: Erik Bethel

So far this week, Chinese metals companies are propelling the stock market further. The Shanghai Composite Index closed at 3,060, having risen close to 60% this year. Stock market leaders include China’s 2nd largest metals producer Jiangxi Copper, which gained 4.3% on Tuesday, and Aluminum Corp of China (Chinalco) which rose 4.5%. Steel giant, Baoshan Iron and Steel (Baosteel), was up 0.5%, while Shougang Steel was up 2.0%.

The sentiment in China is that the nation seems to be recovering and metals producers will continue to rise along with construction and infrastructure spending. There are other factors at play as well. Namely, the fear that if the US recovers, it will increase the velocity of money. In simple terms, the money that has been parked in U.S. banks will actually start circulating. And more money chasing few goods is inflationary. In China many investors feel that putting money in mining stocks is an inflation hedge of sorts.

In other notes, Macquarie came out this week with a report China may suffer a “shortage of iron ore” given that Chinese steel companies have not been able to sign long-term contracts with global iron ore companies. "Because the Chinese refused to sign a formal contract,” noted a spokesperson for Macquarie, “the iron-ore producers are pulling tonnage out of China and pushing it back into Japan, Korea, Taiwan and Europe.”

And finally, last week China’s Ministry of Industry and Information Technology (MIIT) announced that it would put together “guidelines” for consolidating China’s steel industry by the end of 2009. This is big news, actually. There are hundreds of inefficient steel companies in China and Beijing wants them to consolidate. The general premise is that larger, more powerful firms will have the leverage necessary to deal with the Big Three iron ore companies (BHP, Rio Tinto and Vale), and larger firms will (in theory) be more environmentally conscious and socially responsible.

Stay tuned on this one. The big winners could be Baosteel and Angang Steel.