What does strong Chinese growth mean for iron ore?

State-owned Chinalco, one of China’s biggest resources companies and the largest shareholder of Rio Tinto (ASX: RIO), believes demand for commodities will grow faster than country’s GDP as urbanisation and industrialisation continues. Chairman Xiong Weiping urged both the Chinese government and other governments around the world to take advantage of the economic development.

Mr Xiong believes the country’s 25.3% increase of mineral demand in the past 10 years will grow further in coming years. He said, “Faster economic growth means faster growth of demand for minerals.”

China’s GDP growth is expected to average 7.5% for the year but demand for commodities will go above and beyond that. “The increase of mineral demand is going to be larger than GDP. If China’s future GDP growth stands at 7.5 per cent then the growth rate of China’s demand for minerals will be above 7.5 per cent.”

Mr Xiong believes that the “industrialisation and urbanisation” of China has and will continue to be the reason the country will demand more resources in the next decade. It will provide a “strategic opportunity for China’s mining industry” and foreign miners that export seaborne commodities like iron ore and copper.

According to The Australian, the China-Australia trade partnership is our country’s biggest and “worth up to $US130 billion ($137 billion) a year.” Australia’s most lucrative export is iron ore and, currently, Rio Tinto is the biggest producer followed by BHP (ASX: BHP) and Fortescue (ASX: FMG).

Each company recently upgraded production targets to meet strong Chinese demand but some analysts have become concerned that increased supply from new mines in Australia, South America and Africa will result in a supply glut, putting downwards pressure on the price of iron ore.

Foolish takeaway

If Mr Xiong is correct, Australia’s mining companies stand to directly benefit from the rapid increase in demand because of their high grades of ore, cheap cost and proximity to Asia. In this Fool’s opinion however, there remains too much uncertainty over Chinese demand, and constant write-downs from Rio Tinto are making an investment hard to justify. However there are some smaller, low-cost iron ore companies available at good prices. One such example is BC Iron (ASX: BCI).

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Motley Fool contributor Owen Raskiewicz does not have a financial interest in any of the mentioned companies.  

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