Glory days

For commodities in China, it was fitting that 2009 was the year of the bull. The country’s hunger for tangible investments saw commodity prices skyrocket, with everyone from pig farmers to the central government hoarding copper, precious metals and even garlic.

A slump at the end of 2009, which saw gold shed 4% of its value in a single day, gave some credence to those who had warned that the market was unsustainable. But at the beginning of 2010, analysts remain confident that China’s automakers and construction companies will drive demand for copper and steel, while Chinese consumers’ desire for gold will keep it a top buy.

"Gold remains my top pick," said Robin Tsui, an analyst with Taifook Securities, a subsidiary of Hong Kong’s NWS Holdings, in which jewelry store operator Chow Tai Fook is a major shareholder. "But I am also bullish on copper. Property construction and auto production data are strong, there remains a bleak US dollar outlook and there is no issue of oversupply."

Oversupply is a crucial consideration at a time when China is furiously stockpiling resources – but taking the gold market as an example, it seems that demand is real.

"A strong renminbi will enhance the relative purchasing power of local residents and the currently low level of Chinese residents’ gold stock provides a large potential of private gold hoarding," said Jay Zhou, an analyst at SinoPac Securities.

At the same time, China is likely to want to increase its gold reserves in the face of increasing pressure to revalue the renminbi. Analysts say this is good news for China’s gold mining companies, noting that the likes of Zhaojin (1818.HK) and Zijin Mining (2899.HK) have made aggressive moves for gold resources in recent months.

Smaller miners are also likely to benefit. Inner Mongolia’s Real Gold Mining (0246.HK), which only listed in February 2009, is already attracting positive ratings. The firm is cash rich, unburdened by debt, and has plenty of scope for expansion in largely unexplored Inner Mongolia.

"It’s a new company; they just listed this year, and the growth of both the company and the share price has been quite amazing," Taifook’s Tsui said.

In a November report, Citi analyst Thomas Wrigglesworth classified Real Gold as a "buy," tipping the company to become an established gold producer within two years, with strong growth delivering profits even if metal prices weaken. However, he warns that growth could be undermined by a lack of attractive projects. Tsui of Taifook Securities agrees. "Next year we will see huge growth, but if management does not further expand capacity 2011 will be a very sluggish year," he said.

Still, in their pursuit of new resources, Real Gold and China’s other mining companies reflect optimism in the country’s commodities market for the year ahead. Strong stimulus-led GDP growth in 2009 led to soaring demand for raw materials. Even with a slowdown in stimulus spending in 2010, fundamental demand won’t disappear.

"Lifting billions of inhabitants out of poverty generally requires lots of goods you can drop on your foot," Martin Hutchinson, a US global commodities analyst, wrote in a recent report. "The escalation in demand is likely to continue."