If one had to craft a narrative around the state of the global economic “recovery”, it might go something like this. Wildly optimistic assumptions about the sustainability of China’s torrid economic growth (and the voracious demand for raw materials which accompanied it), led to overbuilding and oversupply in the lead up to the crisis. In the aftermath of 2008, not only have multiple rounds of central bank money printing failed to provide a meaningful boost to aggregate demand, but global trade has also been hampered by China’s transition from an investment-led, smokestack economy to a model driven by consumption and services.
As Goldman put it in May, "there are no other markets large and/or dynamic enough to offset a slowdown in China in the foreseeable future, and we forecast trade volumes to stabilize in the period to 2018." This has been bad news for commodities as the following chart makes abundantly clear:
It’s also bad news for the global mining industry which, as WSJ reports, borrowed “heavily” in anticipation of neverending Chinese demand. Here’s more:...MORE
As forecasts predicting endless growth in China’s appetite for raw materials became a matter of industry faith, mining companies borrowed extensively to build networks of pits, railway lines and port terminals. Megadeals abounded as a merger-and-acquisition frenzy took hold. Cheap borrowing costs, thanks to low global interest rates, fueled the splurge.
Now, as China’s hunger for resources ebbs and mining companies' profits suffer amid falling commodity prices, those debts have become an albatross around the industry’s neck.
Amid a slump in Chinese share prices last week, metals such as copper and aluminum fell to near six-year lows. Iron ore at one point hit its weakest level for a decade.
"There’s been a colossal misjudgment of future demand," said Dali Yang, professor of political science at the University of Chicago. “That long boom made it especially difficult for people to expect anything otherwise. Many bought the big story about urbanization, instead of thinking how things could go bad.”
The world's largest mining companies by market value had accumulated nearly $200 billion in net debt by 2014, six times higher than a decade ago, according to consultancy EY, while their earnings only increased roughly two-and-a-half times. Large mining companies have written off roughly 90% of all the acquisitions they made since 2007, according to Citigroup Inc....