One fund manager believes ASX mining shares could see the demand for their output soar in the near future.
In a Livewire article, VanEck portfolio manager Cameron McCormack suggested China's projected reopening and its pivot away from harsh zero-COVID policies would be the main value drivers for Australian commodity exporters.
So let's peel back the layers of McCormack's thesis to uncover the three ways he expects this change in China to benefit ASX mining shares.
China's infrastructure spending is poised to return
It's anticipated that China will have a renewed focus on spurring economic growth after relaxing its strict measures to eliminate COVID-19.
This could be accomplished through a strong return to infrastructure spending in the country, McCormack said.
Framing this is that Chinese President Xi Jinping made comments in April that an "all-out" focus must be made to increase construction projects in the country, per Bloomberg.
McCormack notes that China made a similar play that kept its economy moving near the end of the global financial crisis in 2009.
A surge in Chinese infrastructure spending was also described as being the "saviour" of Australia's economy that stopped it from slipping into a recession during this time, with Australian commodity producers being the main beneficiaries due to soaring export prices.
China remains reliant on Australian mining resources
Despite a growing geopolitical rivalry between the countries, Australia and China remain tethered by trade due to a mutual reliance on each other's imports and exports.
McCormack notes that "19% of Australian mining revenue is attributed to China".
Iron ore comprises an overwhelming majority of that 19%, which will be vital to sustaining a renewed construction boom in China. Lloyd's List noted last year that "China accounts for more than 70% of global iron ore trade and two-thirds of its imports [of iron ore] currently come from Australia".
McCormack then used a graph provided by Factset showing that some ASX mining shares have far greater exposure to the Chinese market than others.
In order, Fortescue Metals Group Limited (ASX: FMG) sourced most of its revenues from China, with sales to the country making around an 87 per cent contribution to its top line. This was then followed by BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO).
Valuations of ASX mining shares improve
McCormack underlined his thesis by noting that Australian mining shares are trading at record lows, relative to their forward cash flow projections.
This may provide investors with an entry point to scoop them up while they're still cheap.
McCormack said:
The recent downturn in global markets and economic weakness in China has improved the valuation profile of Australian resources. Price to 12-month forward cash flow is at a historic low and iron ore prices have dropped to 2018 levels.
