-- Posted Monday, 9 January 2012 | | Disqus

Despite a pullback in growth for China, copper demand is likely to remain strong in 2012, according to Dr. Michael Berry, publisher of Morning Notes, and his co-author, Chris Berry, founder of House Mountain Partners. In this exclusive interview with The Gold Report, the Berrys explain how other developing nations, such as Indonesia, should pump up demand, but supply from such regions remains a tenuous prospect.

The Gold Report: In a recent edition of Morning Notes, you referenced some "sprouting" problems in China. What are those problems and are they likely to affect China's economy?

Michael Berry: We spent a couple of weeks in Shenzhen, China, and Hong Kong last month. On the surface, there do not appear to be any real problems in China. The infrastructure is fabulous—new roads, tunnels, bridges and stadiums. There are a lot of institutional investors in China with a tremendous thirst for knowledge. But old China hands—and I've been there many times since the 1960s—feel that there are serious problems beneath the surface, including inflation, slowing exports, bad loans and overbuilding.

During our visit to China, investment bankers we met with indicated that there are vacancies and see-through buildings in many cities. This is always a precursor of problems to come. China has an export-led economy and the U.S. and Europe, two of its main customers, have slowed down considerably. We may see a recession in Europe this year, which would bode ill for China, which counts the Eurozone as one of its largest trading partners.

An important question is how quickly can China transform itself into an economy with healthy domestic demand? That's going to take years. There are also concerns about whether China can continue to grow at a breakneck speed of 9% or 10% per year. Most of the forecasts show China's gross domestic product (GDP) will slow considerably over the next six years; however, it will still maintain growth levels above the Western economies. But problems are lurking in China, no doubt. The best we can hope for is a soft landing in 2012.

TGR: Paul Krugman recently wrote in The New York Times that China is on the verge of a massive real estate bubble. The World Bank recently lowered its GDP forecast for China to 8.4% from 9.1% in 2012.

MB: Growth will certainly slow, but China is better positioned to handle problems with overbuilding and bad debt than the U.S. China has been running huge surpluses for years and has accumulated significant foreign exchange reserves by pegging its currency to the U.S. dollar at artificially low levels. Japan recently inked a deal with China to buy its bonds. The Chinese currency and economy are slowly coming out of their self-induced isolation.

We remain cautious, however. China has a cushion here, but as we said before, there are some lurking issues and Paul Krugman touches on one in his piece.

TGR: How could a slowdown affect copper demand?

MB: Copper is probably the single metal that reflects good times in the world and growth. It is called the metal with a Ph.D. in economics because it's so necessary for and indicative of economic growth. Expect supernormal growth of 5–7% in a number of emerging economies, which will keep demand for copper strong going forward.

The real question is from where will additional supply of copper come? There are the beginnings of a supply crunch in copper, which is affecting a number of mines worldwide. We are witnessing a combined supply-demand issue, not just a demand issue. Resource nationalism, falling grades and adverse weather are just a few issues affecting copper today. This is troubling but ultimately a good omen for junior mining companies involved in copper exploration.

Chris Berry: China is responsible for about 40% of global copper consumption, and copper is a 16-million-ton-per-year market. If GDP growth in China slows even from 9% to 8%, copper consumption has to fall in line unless other countries can pick up the slack in demand. What countries hold the potential to do this? Looking at demographics, potential demand and infrastructure build-out, several emerging markets come to mind including Brazil and India as well as "second tier" emerging markets such as Indonesia, Turkey or Colombia. If these countries do indeed grow at above-trend growth rates, you must then ask where additional supply is going to originate from—and supply appears tight going forward.

You can add labor strife to the list of issues potentially curtailing copper supply. Labor issues at mines promise to remain front and center as high metals prices make mining a more financially attractive pursuit. Between supply and demand, I think copper supply is the more important of the two to focus on.

TGR: The junior resource sector had a difficult time in 2011. The Toronto Stock Exchange Venture Composite Index, which is mostly composed of junior resource companies, was at about 2,400 in April, but had fallen to 1,450 by the end of December. Do you think we'll see a sector rebound in 2012?

MB: There are strong headwinds for a lot of these companies and 2011 was unkind to the junior mining space in general. Very few junior mining companies have escaped the wrath of the pullback in commodities and overall panic at issues that have developed around the world. Investors must now focus on which companies can sustain themselves until we're over the hump. We're not there yet. The question will be which stocks can stand the test of time, can sustain their exploration and development activities and raise sufficient capital to fund operations in a difficult environment, to put it mildly.

TGR: Thanks to both of you.

Dr. Michael Berry served as a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia from 1982-1990, during which time he published a book, Managing Investments: A Case Approach. He has managed small- and mid-cap value portfolios for Heartland Advisors and Kemper Scudder. His publication, Morning Notes, analyzes emerging geopolitical, technological and economic trends. He travels the world with his son, Chris, looking for discovery opportunities for his readers.

Chris Berry, with a lifelong interest in geopolitics and the financial issues that emerge from these relationships, founded House Mountain Partners in 2010. The firm focuses on the evolving geopolitical relationship between emerging and developed economies, the commodity space and junior mining and resource stocks positioned to benefit from this phenomenon. Widely quoted in the press and a frequent speaker at conferences throughout the world, Berry holds a Master of Business Administration in finance with an international focus from Fordham University and a Bachelor of Arts in international studies from The Virginia Military Institute.

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-- Posted Monday, 9 January 2012 | Digg This Article | Source: GoldSeek.com

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