When investing in the UK market, it sometimes seems as if the most important factor to consider is the phenomenal economic growth currently being produced by China.
This affects a number of sectors, but none more so than those relating to commodities.
Although it is well publicised that China's thirst for oil has driven the price of crude oil up to current highs, there are a number of other commodities that have also seen extremely strong growth. This increase in demand has been very good news for the mining sector, and for those investors who hold one or more of the three major UK mining stocks, Anglo American, BHP Billiton and Rio Tinto.
The first of these companies to report was BHP Billiton, which announced fourth quarter production figures last Thursday. These figures included production at WMC, the Australian mining company BHP Billiton took control of at the beginning of June. Although there had been other parties interested in acquiring the company, following the successful bid, BHP Billiton is now in the process of compulsorily purchasing all remaining WMC shares.
As well as obviously increasing the company's scale and level of production, WMC provides BHP Billiton with an increased supply of uranium, an area which could eventually see significant growth, as many western countries attempt to reduce their dependency on fossil fuels.
In order to cut the level of CO2 individual countries produce, it is likely that nuclear power will become increasingly important as other green alternative energy sources struggle to provide the levels of energy required.
Within it's results, BHP Billiton announced record annual production within several key commodities, a trend I am sure will be repeated in Anglo American's and Rio Tinto's results, which will be announced later this week.
This increase for raw materials has, however, also had a negative consequence, as increased project construction activities across the industry continues to drive tight labour markets and increased input costs. It has even been reported that the current strong demand for heavy plant machinery has caused a global shortage of the tyres needed for the enormous vehicles used in mining.
While BHP Billiton has seen a strong rise in copper, nickel and iron ore production, it has unfortunately seen a drop in the level of mined diamonds. BHP Billiton currently has six per cent of the world's rough diamond production, which equated to 3.6 million carats mined during the fourth quarter. While this may seem enough to keep most Premiership footballers in earnings for the rest of their lives, it is 34 per cent less than the same quarter last year, due to the lower grade of ore the company is currently mining.
As Anglo American and Rio Tinto are expected to announce very good results this week, it seems as if the rise in the mining sector still has some way to go. The slight correction in China's currency announced two weeks ago is also likely to be beneficial for the sector.
Although China is supposedly making attempts to slow its economic growth, so that there a soft landing rather that a crash, the country is still reporting GDP growth of more than eight per cent per annum.
Until the country's insatiable demand for commodities finally begins to wane, it seems, at least for the moment, as if the mining sector will continue to grow.
* Michael Rankin is an investment manager in the Teesside office of Wise Speke and can be contacted on (01542) 608855. Views expressed are the author's own and are not necessarily held throughout the Brewin Dolphin Group. Wise Speke is a division of Brewin Dolphin Securities Ltd, a member of the London Stock Exhange, authorised and regulated by the Financial Services Authority. Prices, values or income may fall against investor's interests. You should therefore be aware that you may get less back than you invested. Investments may not always be suitable for all individuals. If you have any doubts, you should consut a professional advisor.
Published: 02/08/2005
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