Thursday, August 20, 2009

Sustaining a Global Recovery

Sustaining a Global Recovery


Olivier Blanchard

The recovery has started. Sustaining it will require delicate rebalancing acts, both within and across countries

In normal recessions, however disruptive they are to businesses and jobs, things turn around predictably. The current global recession is far from normal.

Usually, to fight a recession, the central bank lowers interest rates, which results in increased demand and output. People resume buying durable goods such as appliances and cars. Firms start delayed investment projects. Often, an exchange rate depreciation gives a boost to exports by making them cheaper. The lower-than-normal growth during the recession gives way to higher-than-normal growth for some time, until the economy has returned to its normal growth path.

But the world is not in a run-of-the mill recession. The turnaround will not be simple. The crisis has left deep scars, which will affect both supply and demand for many years to come.

Supply-side problems

Olivier Blanchard

Olivier Blanchard: "Some parts of the economic system have broken."

Some parts of the economic system have broken. Some firms went bankrupt that would not have in a normal recession. In advanced countries, the financial systems are partly dysfunctional, and will take a long time to find their new shape. Meanwhile, financial intermediation—and, by implication, the process of reallocation of resources that is central to growth—will be impaired. In emerging market countries, capital inflows, which decreased dramatically during the crisis, may not fully come back in the next few years. Changes in the composition of world demand, as consumption shifts from advanced to emerging economies, may require changes in the structure of production. In nearly all countries, the costs of the crisis have added to the fiscal burden, and higher taxation is inevitable.

All this means that we may not go back to the old growth path, that potential output may be lower than it was before the crisis.

How much has potential output decreased? It is very hard to tell: we do not see potential output, only actual output. The historical evidence is worrisome, however. The IMF’s forthcoming World Economic Outlook presents evidence from 88 banking crises over the past four decades in a wide range of countries. While there is large variation across countries, the conclusion is that, on average, output does not go back to its old trend path, but remains permanently below it.

The possible good news is that the trend itself appears to be unaffected: on average, crises permanently decrease the level of output, but not its growth rate. So, if past is prologue, the world economy likely will return to its past growth rate. But, especially in advanced countries, the period of above-average growth, characteristic of normal recoveries, may be short-lived or nonexistent.

Demand-side issues

Just achieving "normal" growth, however, may be hard because of demand problems. The forecasts now predict that growth will be positive in most countries, including advanced countries, for the next few quarters.

But there are two caveats to this news:

• Growth will not be quite strong enough to reduce unemployment, which is not expected to crest until some time next year.

• These positive growth forecasts are largely predicated on a combination of a fiscal stimulus and inventory rebuilding by firms, rather than on strong private consumption and fixed investment spending. Sooner or later, the fiscal stimulus will have to be phased out. And inventory adjustment will also naturally come to an end.

The question, then, is what will sustain the recovery.

Two rebalancing acts will have to come into play. First, rebalancing from public to private spending. Second, rebalancing aggregate demand across countries, with a shift from domestic to foreign demand in the United States and a reverse shift from foreign to domestic demand in the rest of the world, particularly in Asia.

Rebalancing public and private spending

The fiscal response to the crisis was to increase government spending, lower taxes, and accept much larger fiscal deficits. Given the collapse of private demand, and the inability to reduce interest rates below zero, governments clearly chose the right response. But large deficits lead to rapid increases in debt, and, because debt levels were already high in many countries, such increases cannot go on for long. As large deficits continue debt sustainability comes increasingly into question. And with this comes the risk of higher long-term interest rates, both because of anticipated crowding out of private borrowers by government borrowers and because of a higher risk of default.

How much longer can the fiscal stimulus continue? On its own, in most advanced countries, probably not very long. The average ratio of debt to gross domestic product (GDP) for the G-20 advanced economies was high before the crisis, and is forecast to exceed 100 percent in the next few years. (The situation is substantially different in a number of emerging market countries, where debt was much lower to start, and where there is more room for deficit spending.)

An important qualifier is "on its own." The stimulus can be prolonged if, at the same time, structural measures are taken to limit the future growth of entitlement programs—whether from rising health care costs or from the effect of aging populations on retirement costs. The trade-off is fairly attractive. IMF estimates suggest that the fiscal cost of future increases in entitlements is 10 times the fiscal cost of the crisis. Thus, even a modest cut in the growth rate of entitlement programs can buy substantial fiscal space for continuing stimulus.

Eventually, however, the fiscal stimulus will have to be phased out, and private demand must replace it. The source of that demand—whether consumption or investment—is a crucial issue.

Rebalancing demand across countries

The United States was not only at the origin of the crisis, it is central to any world recovery. Consumption represents 70 percent of total U.S. demand, and its decline was the main near-term cause of the fall in output in this crisis. The ratio of U.S. household saving to disposable income, which was close to zero in 2007, has increased to about 5 percent. Will the saving rate go back to its 2007 level? That would not be desirable, and is unlikely.

On the one hand, some of the increase in saving in the last year probably reflected a wait-and-see attitude on the part of consumers, an attitude that will go away as the smoke clears. On the other hand, the saving rate tends to go up as output and income expand. And even if financial wealth returned to its pre-crisis level—be it in housing (which seems undesirable and unlikely) or in stocks—and output returned to its trend path, U.S. consumers would still probably save more. The reason is that the crisis has made them more conscious of tail risks—events that are unlikely to occur but, when they do, have devastating consequences.

Before the crisis, it was an article of faith that housing prices rarely, if ever, decreased (a belief that was a main contributor to the crisis). Another article of faith, one backed by stronger historical evidence, was that investors could count on stocks yielding an annual rate of return of 6 percent. Last year’s decline in the stock market showed that those yields cannot be taken for granted, and that more saving may be needed to ensure a safe retirement. Thus, U.S consumers are likely to save more, at least until they forget the lessons of the crisis. The best guess (and there is little more to go on) is that the U.S. household saving rate will remain at least at its current level. That means a 5 percentage point decline in the ratio of consumption to disposable income relative to the pre-crisis period, or about a 3 percentage point drop in the ratio of consumption to GDP. Put simply, 3 percent more of U.S. aggregate demand will have to come from something other than consumption.

Will it be from investment? This also seems unlikely. Housing investment, as a percentage of GDP, was too high in the years preceding the crisis, and it will take a long time to get rid of the backlog of houses. Until that happens, housing investment will be low. Will fixed investment, again as a percentage of GDP, be higher after the crisis than it was before? Probably not. Capacity utilization is at a historical low, and will take a long time to recover. While banks may be solvent now, they are still tightening credit, and tight lending standards are likely to last a while. Less-efficient financial intermediation will affect not only the supply side, but also the demand side. Again, historical evidence from "creditless" recoveries suggests that investment will be weak for a long time.

Can low interest rates help?

It is likely that, at any given interest rate, U.S. private domestic demand will be weak for a long time, weaker than it was before the crisis. Note however the qualifier "at any given interest rate." This appears to offer room for some optimism. The short-term riskless rate is lower now than it was in the pre-crisis years. Over the three years before the crisis, the average nominal U.S. treasury bill rate was 4 percent, while the average inflation rate was 3 percent. That resulted in a real—that is, after-inflation—rate of 1 percent. Today, the treasury bill rate is roughly zero and inflation expectations appear anchored around 2 percent. That implies a real rate of around –2 percent—that is, 3 percentage points below its pre-crisis level.

The Federal Reserve can leave the policy rate—the federal funds rate—at zero if it needs to, and, because inflation expectations are more likely to increase than to decrease, real rates are likely to remain negative. An old rule of thumb is that a 1 percentage point lower real rate that is expected to remain so for some time leads roughly to a roughly 1 percent increase in aggregate demand. A decrease in the real rate of 3 percentage points would seem sufficient to offset the caution of consumers and firms and sustain the recovery.

But it may not be. What matters for demand is the rate at which consumers and firms can borrow, not the policy rate itself. As was clear during this crisis, the rate at which consumers and firms borrow often is a lot higher than the policy rate. Risk premiums on U.S. BBB-rated bonds, for example, are nearly 3 percentage points higher than before the crisis. This higher risk perception may well be an enduring legacy of the crisis. (The Great Depression led to a large increase in the risk premium on stocks, which lasted for the better part of four decades. But the Depression lasted a long time, and this crisis appears unlikely to have the same psychological impact.) Higher risk premiums, then, could undo, at least in part, lower policy rates. U.S. policymakers cannot count on low interest rates alone to deliver a sustained U.S. recovery.

Can Asia help?

If the U.S. recovery is to take place, if the fiscal stimulus must be phased out, and if private domestic demand is weak, then U.S. net exports must increase. In other words, the U.S. current account deficit must decrease. That means that the rest of the world, now in substantial surplus, must reduce that current account surplus. Where should this reduction come from?

It is natural to look first at the countries with large current account surpluses. Among them, most prominently, are Asian countries. And most prominent among them is China. From the point of view of the United States, a decrease in China’s current account surplus would help increase demand and sustain the U.S. recovery. That would result in more U.S. imports, which would help sustain world recovery.

Why might China be willing to go along? Because it may well be in its own interest: China’s growth has been based on an export-led growth model that relies on a high saving rate, leading to low internal demand, and a low exchange rate, leading to high external demand. The model has been highly successful, but is leading to the accumulation of extremely large reserves and pressure is building to increase consumption. The high rate of saving reflects the lack of social insurance and the resulting high precautionary saving by households, limited access of households to credit, and governance issues in firms that lead them to retain too high a proportion of their earnings. Providing more social insurance, increasing household access to credit, and improving firms' governance are all desirable on their own, and would lead both to lower saving and higher internal demand. If such an expansion of demand runs into supply-side constraints, this higher internal demand would have to be partly offset by lower external demand, meaning an appreciation of the Chinese renminbi (RMB) at least in real terms. Both higher Chinese import demand and a higher RMB will increase U.S. net exports.

Other emerging market Asian countries also run large current account surpluses. Their motivations vary—some want to accumulate reserves as insurance, others chose an export-led growth strategy that incidentally affects the current account and reserve accumulation. Many of these countries could decrease saving, public or private (as the dramatic decline in household saving in Korea since the 1990s demonstrates), and allow their currency to appreciate. That would lead to a shift from external to internal demand and to a reduction in their current account surplus.

Their incentives, however, are weaker than China’s. Having substantial reserves has proved very useful in the crisis. Swap lines from central banks, and multilateral credit lines—such as the "flexible credit line" created by the IMF during the crisis—could reduce the demand for reserves. But swap lines and credit lines might not be renewed, and so do not offer quite the same degree of safety as reserves. (Establishing arrangements to substantially reduce reserve accumulation would also be both highly desirable in the long run and would help to sustain the recovery in the short and the medium run.) Thus, countries that have adopted an export-led growth model may reassess that policy and give more weight to internal demand, but any change is likely to be gradual.

To get a sense of magnitudes, another rough computation is useful. The GDP of emerging Asia is roughly 50 percent of U.S. GDP (with the ratio projected to increase to 70 percent in 2014). So, if all its trade was with the United States, Asian countries would have to lower their current account position by 4 percent of GDP to improve the U.S. current account by, say, 2 percent of GDP (which represents a 3 percent shortfall in the ratio of consumption to GDP less the 1 percent increase in U.S. demand coming from lower real interest rates). Since emerging Asia’s trade is not all with the United States, the adjustment would likely have to be even larger. This raises the question of whether other countries can and should play a role.

What role for non-Asian countries?

A number of other countries, including some advanced countries, also have current account surpluses. For example, Germany’s surplus for 2008 is half that of China’s (although it is shrinking fast); Japan’s surplus is one-third of China’s.

Should Germany, for example, reduce its surplus? It cannot follow the same route as that suggested for China—that is a currency appreciation accompanied by a decrease in saving. Because it is part of the euro area, Germany cannot engineer an appreciation on its own. And, on the demand side, it suffers largely from the same problem as the United States: it has limited room on the fiscal side, and it is not clear that it is either desirable or feasible to get German consumers to save less. Germany could, however, improve productivity in its nontradable sector, which would be in its interest. This would, in time, lead to a reallocation of demand toward non tradables and reduce its current account surplus.

The same argument applies to Japan. But, because such structural reforms are politically difficult, and because their effects take place slowly, it is likely to be a slow process—too slow to provide substantial support to the recovery over the next few years. So, if rebalancing is to come soon, it probably has to come largely from Asia, through a decrease in saving and an appreciation of Asian currencies vis-à-vis the dollar.

What if rebalancing does not happen?

This tour of the world suggests three conclusions:

• First, the crisis is likely to have led to a decrease in potential output. One should not expect very high growth rates in the recovery.

• Second, sustained recovery in the United States and elsewhere eventually requires rebalancing from public to private spending.

• Third, sustained recovery is likely to require an increase in U.S. net exports and a corresponding decrease in the rest of the world, coming mainly from Asia.

One can question all three conclusions.

On the supply side, the effect of potential output is highly uncertain. After all, despite the pessimistic historical evidence, some countries have emerged from banking crises without experiencing a visible impact on potential output (on the other hand, though, some countries have seen a long-lasting negative impact not only on the level of GDP, but also on its growth rate).

On the demand side, the fiscal space in advanced countries may be larger than expected, allowing the United States to sustain longer-lasting deficits and a higher debt level than currently forecast without raising market concerns about debt sustainability. If this is the case, rebalancing private and public spending can be phased in more slowly if needed, allowing more time to achieve a rebalancing of world demand. Alternatively, private demand in the United States may be stronger: U.S. consumers could return to their old ways and save less. That would help the recovery and avoid the need for a major adjustment of net exports, although it would recreate in the longer run some of the problems that caused the current crisis. Or it could be that the world decouples—that Asia, for example, is able to return to high growth, while recovery in advanced countries falters. But the crisis, and the strong export links that turned a U.S. shock into a world recession, suggests that decoupling, although possible, is unlikely.

If, however, one accepts the argument that both rebalancing acts are likely to be necessary for a sustained recovery, the next question is whether they will take place. It is clear that they may not, at least not on the scale needed. If, for example, Asia is unwilling to reduce its current account surplus and U.S. net exports do not substantially improve, weak U.S. private demand may lead to an anemic U.S. recovery. In that case, there would likely be strong political pressure to extend the fiscal stimulus until private demand has recovered.

Were that to happen, one can imagine various scenarios: political pressure may be resisted, the fiscal stimulus could be phased out, and the U.S. recovery would then be very slow. Or fiscal deficits might be maintained for too long, leading to issues of debt sustainability and worries about U.S. government bonds and the dollar, and causing large capital flows from the United States. Dollar depreciation may take place, but in a disorderly fashion, leading to another episode of instability and high uncertainty, which could itself derail the recovery.

Sustaining the nascent recovery is likely to require delicate rebalancing acts, both within and across countries. An understanding of the issues and the dangers, and some coordination across countries, is likely to be as crucial during the next few years as it was during the most intense part of the crisis.

Olivier Blanchard is Economic Counsellor and Director of the IMF’s Research Department.

IMF Offers The Answers, But Are Governments Willing To Ask The Right Questions?

IMF Offers The Answers, But Are Governments Willing To Ask The Right Questions?

By TradingHelpDesk on August 20, 2009 |

contentThe International Monetary Fund (IMF) has released an excellent report analysing the global economy and the recovery to-date. Also provided is a recommended action-list enabling central banks and governments to achieve sustainable growth going forward.

The report identified the current recession as being fundamentally different to “normal” recessions in its cause as well as the depth and length of the contraction. The consequences of the financial sector led recession will alter both demand and supply characteristics for years to come with western domiciled personal and corporate balance sheets damaged beyond easy repair. The usual ingredients for a recovery; lower interest rates and currency depreciation would be insufficient in isolation to create increased domestic demand and an improvement in the trade balance (higher exports). The IMF is clearly describing the US, and to a lesser degree the UK and Europe, in its analysis.

Post recession, the IMF suggest, the balance of economic power between the west and Asia could change permanently with the old model of western consumers borrowing to pay for Asian manufactured goods ceasing to exist as a primary tool for securing global growth.

The International Monetary Fund predicts sustainable global growth can only be achieved if developed economies increase their exports to Asia and other emerging regions. If however, Asia continues to feed the region’s fast growing consumption with domestic and regional output only, a two-speed global economic system would develop with Europe and the US experiencing sub-par growth for decades, with western domestic demand further damaged by stubbornly high unemployment and an inevitable increase in the tax burden required to fix government shortfalls in tax receipts versus public expenditure.

Interestingly, the IMF has put forward the very argument used by equity bears and cited the current recovery as being prompted by “fiscal stimulus and inventory rebuilding” rather than “strong private consumption and fixed investment spending”. The IMF highlighted the inevitable reversal of government stimulus as the vulnerable point in the recovery curve. If at that stage consumers and businesses do not pick up the spending baton, the recovery will fade and a double-dip recession will occur. This is a fairly obvious point and presumes pessimistically that confidence - the foundation of consumption and investment - could be absent whereas numerous surveys show consumer and business confidence is strengthening so in all likelihood the private sector will take the recovery further when government stimulus is withdrawn. Nevertheless, the IMF is accurate in its identification of the key risk, though that risk looks unlikely to materialize given ongoing consumer and business confidence data.

Reviewing western fiscal deficits in more depth, recent government efforts to rescue demand with stimulus were confirmed as necessary and welcomed. However, the IMF insisted the continued growth in fiscal deficits to be unsustainable and a plan for remedy, spending cuts and tax increases, should be clarified and introduced as soon as possible prevent a possible collapse in demand for government debt and a spike in interest rates (issuers would forced to offer higher returns to bond investors to compensate for a higher risk of default or currency devaluation). The IMF also advised that aging populations, and their effect of the ratio of tax revenues to benefits, were in fact a bigger danger to the fiscal stability of western governments than the financial crisis had proved to be. Their solution: To cut the “future growth” of entitlement programs in healthcare and retirement provision. Clearly, such a move would seriously jeopardize the re-election of any government that put-forward and executed such a policy.

Is It A Bear Market Or Just A Breather For China’s Smoldering Shanghai Index?

Is It A Bear Market Or Just A Breather For China’s Smoldering Shanghai Index?

By Money Morning on August 20, 2009 |

China’s Shanghai Composite Index (SSE) has been the world’s best performing major market index this year, but it has tumbled nearly 20% since hitting its Aug. 4 peak. Many analysts are concerned that the decline is evidence that China’s rapid recovery is unsustainable, but the more plausible explanation is that investors are simply taking profits in a hot market that’s long been due for a correction.

The SSE, Chinas’ benchmark index, zoomed 91% from the start of the year to Aug. 4, hitting a high of 3,478.01. Even with the recent pullback it remains up about 67% from last year’s low of 1,664.93.

Since Aug. 4, however, the SSE has slumped 19.8%, including a 4.3% drop yesterday (Wednesday) to close at 2,785.58. Contributing to the market’s decline has been a sharp drop in lending, concern about an imminent possible tightening of credit, a strain from an increase in initial stock offerings, and the failure by Beijing to take action to put a floor under China’s stock prices. But the biggest reason for the drop has almost certainly been profit taking.

There are any number of rumors and reasons for why the China markets have been falling,” Peter Lai, a director with DBS Vickers Securities, told Reuters. “But ultimately, those are all excuses for investors to take profit on the big rally this year.”

To be sure, investor panic over tighter lending and Beijing’s reluctance to throw the stock market a lifeline have contributed to the decline, but they - like the profit-taking that has driven the downward spiral - is likely to be short term in nature. And while the correction probably has more room to run, Asian analysts believe there’s good reason to believe that this bear-market swoon will turn back into a bull-market rally before October, due to a looming national day of observance.

To begin with, the Shanghai index is historically volatile. Shanghai Class A have in the past traded as low as 10 times earnings and as high as 60 times earnings. They’re currently about 25 times their projected 2009 earnings, which suggests there is still room to fall, but a much greater potential for a rally.

The Chinese market is very trend-oriented because there are many individual investors,” Philippe Zhang, chief investment officer at AXA SPDB Investment Managers in Shanghai, told Bloomberg. “It can rally very quickly and go down strongly as well.”

And, as stated earlier, there are some very good reasons why investors chose now to take a breather - beginning with lending.

New bank lending plunged to $52 billion (355.9 billion yuan) in July from $220 billion (1.53 trillion yuan) - a 77% drop. However, that drop was largely expected as China’s $585 billion stimulus package and lax lending policy helped pave the way for growth in the first half of the year.

Chinese banks lent about $1.08 trillion (7.37 trillion yuan) in the first half of the year, nearly double the total loans extended throughout all of 2008. Even with the slowdown, analysts still expect total lending to exceed $1.5 trillion ($10 trillion yuan) this year.

That means the Chinese economy will remain flush with liquidity for the foreseeable future. And just to be on the safe side, the China’s State Council has issued a directive to banks to provide more loans to smaller firms.

“We will give appropriate subsidies to financial institutions to support them in extending loans to small companies,” the council said following a regular weekly meeting.

It also will extend measures to reduce the social security contributions paid by smaller firms that are facing difficulties and will increase tax support and direct government funding for them.

The slowdown in new lending is an excuse for investors to exit a market that’s risen too fast and gotten too expensive,” AXA SPDB’s Zhang told Bloomberg.

Another reason Chinese stocks have slipped is that the government hasn’t stepped in to put a floor under prices.

“Investors are disappointed that regulators failed to take any concrete steps to support the market, while sentiment is extremely shaky after the market’s tumble over the past two weeks,” analyst Chen Huiqin at Huatai Securities Co. Ltd. in Nanjing told Reuters.

But that could change - and soon - due to the looming observance of the 60th anniversary of the Chinese Communist Party’s rule. That celebration is scheduled for Oct. 1.

Jing Ulrich, head of China equities and commodities at JPMorgan Chase & Co(JPM: 42.5825 +1.1725 +2.83%), said that “in the event of future correction, the Chinese authorities will be prepared to put a floor under the stock prices.” That support could include an elimination of taxes on stock transactions and a slowdown of measures that are designed to absorb excess liquidity.

“Liquidity conditions will remain favorable, as authorities may accelerate mutual fund approvals and insurance and pension funds could step up their equity purchases,” she said. “We believe the ‘A’ share market will resume its upward trajectory after this period of correction.”

If the market doesn’t stabilize quickly enough, or if government measures don’t have the desired impact on the market’s momentum, then the Communist Party may be prompted to more direct action as its 60th anniversary approaches. In fact, the approach of the anniversary alone could trigger a rally by spurring a shift in public sentiment.

The widespread belief that Beijing doesn’t want the markets to fall before Oct. 1 will become a self-fulfilling prophecy,” Guoyuan Securities Co. Ltd. strategist Simon Wang told The Wall Street Journal.

Wang pegs support for the SSE at 2,600 - which is about 7% below yesterday’s close, and which would represent a total decline of 25% from the Aug. 4 peak.


Four "new" entrants to world's top 100 mining stocks - the oil miners

Introducing Suncor, Petro-Canada, Canadian Oil Sands Trust, and Sasol, all miners, at heart.

Author: Barry Sergeant
Posted: Thursday , 21 May 2009


Investing is a moveable feast; akin sometimes to being among converted zealots about to take the mountain one day, the next day like being in a casino full of yahoos, and the next day falling like giddy Icarus under hot-waxed wings. By the same token, definitions in the investing game shift and alter continuously, wrinkles here, holes there, and hidden quicksand down there. There are some days when clarity may surface, if only for a moment.

On the global resources scene, one description of a miner is of a man standing next to a hole in the ground; because this man is a miner, he's a liar. The cynics will tell you that Bre-X proved that, once and for all. The more modest definition of a miner is of a hard working dedicated entrepreneur that has independent evidence to prove that the gold you are about to buy from him is really . . . gold.

But looking at the underlying stuff being sought, and hopefully found, and then dug out and sold, when is a miner a miner? Oil and gas companies are normally considered as being in a separate class, led by Exxon Mobil, the world's most valuable company of any kind, with a current market value (capitalisation) of USD 340bn. For oil and gas companies, there is no real digging involved, unlike miners who have to sweat it out.

Cement makers also are not seen as miners, even though cement is made by heating limestone (which does not grow on trees) with small quantities of other materials, often clay, to 1,450°C in a kiln. The resulting "clinker" is then ground with a small amount of gypsum into a powder to make "Ordinary Portland Cement". Is limestone mined, or quarried? Is gypsum, a common mineral, mined, of simply picked up? What about companies which produce aggregates? Are those too boring to be classified as miners?

In the mining arena, BHP Billiton is often described as the world's "biggest miner", where the more accurate description would be the world's "biggest diversified resources stock", given that it operates a material oil and gas division, in its words, a petroleum division. And then there are companies that go upstream, as seen in the case of steel maker ArcelorMittal, which is getting increasingly into iron ore and also coal mining. There are also any number of miners which have gone downstream; Shenhua, a giant Chinese coal miner, also produces power in coal fired stations and, inevitably, is involved in rail and port operations. Vale, the world's No 2 mining company by value, operates and owns for its Brazilian iron ore mines rail roads, handling facilities, and ports. During 2008 the supergroup splashed out USD 1.6bn for 12 "large" ore carrying ships. Every miner would like one or two of those, but that would entail finding trustworthy skippers.

Even with supposedly clear gold miners, the profile may not be so simple. Barrick, the world's biggest gold digger, produced 7.7m ounces of gold in 2008, but it also happened to produce 370m pounds of copper, worth USD 1.2bn, at its gold mines. And there sits 1.1bn ounces of silver in Barrick's proven and probable reserves.

Barrick's giant Pascua-Lama project, straddling high ground in Argentina and Chile, and recently given a USD 2.9bn build green light, holds reserves of 17.8m ounces of gold, 717.6m ounces of silver, and 649.5m pounds of copper. Then, of course, there was the 2008 formation of Barrick Energy, inspired by high exogenous power costs across the Barrick group. That included the 2008 acquisition of Cadence Energy Inc. for cash of USD 377m, and also oil and gas assets at Sturgeon Lake, Alberta, from Daylight Resources Trust, for cash of USD 83m.

Does all this qualify Barrick as a "diversified resources group?" There are other companies that cross the divide into hydrocarbons, as users and/or owners; takePotashCorp, world's No 5 miner by value, and by far the biggest miner of potash. In order to produce the magic combine of NPK (nitrogen, phosphorus and potassium), the three key ingredients of integrated fertiliser, PotashCorp also mines phosphate rock, and produces nitrogen (typically ammonia and/or urea), using natural gas as a feedstock.

And then there is Syncrude Canada - the world's largest producer of light sweet crude oil from oil sands. Syncrude operates oil sands mines, utilities plants, bitumen extraction plants and an upgrading complex. This is the leading single source of Canada's oil, producing 111.3m barrels a year. Syncrude is unlisted, but is owned by seven entities, including Canadian Oil Sands (37%), Imperial Oil(25%), and Petro-Canada (12%).

And then there is Suncor, also a big oil sands specialist. As one analyst puts it: "Suncor and Syncrude are today the largest mines in the world - by tons of material moved as well as value of product mined". Logic dictates the inclusion of relevant names as mining companies; after all, coal (carbon) companies, always seem to make the cut as mining companies. For now, however, Imperial Oil remains a better fit outside mining, given its substantial business beyond its interest in Syncrude. Imperial Oil is 69.6% held by ExxonMobil. Suncor and Petro-Canada are currently engaged in a friendly merger; the pro forma value of the new company would be USD 48.8bn, which would rank it No 5 mining company in the world, by market value.

And then there is South Africa-based Sasol, best known for upgrading coal to produce synfuels, from gasoline to diesel and beyond, along with a plethora of chemical by products. The group also has interests in natural gas, oil, and chemicals, but, at its core, Sasol mines around 43m tons of saleable coal a year, mainly for gasification feedstock and utilities coal for its complexes in South Africa. Around 3m tons of group coal production is exported.









USD bn

BHP Billiton

GBP 14.14





USD 19.45





CNY 26.64




Rio Tinto

GBP 28.16





CAD 130.24




Anglo American

GBP 15.72





USD 36.22





CAD 36.35





GBP 6.39





USD 36.73





USD 56.82





INR 293.05





USD 35.99





USD 45.55





USD 10.84





USD 50.00





CAD 44.85





USD 21.72




Southern Copper

USD 20.24




China Coal

CNY 12.06





CNY 10.73




Anglo Platinum

ZAR 506.03





CNY 9.14





USD 10.75




AngloGold Ashanti

USD 37.11





USD 18.68





ZAR 166.20





AUD 31.82





EUR 51.60




Canadian Oil Sands

CAD 27.48





GBP 5.64





CAD 30.51




Shanxi Xishan

CNY 28.20




Sociedad Química

USD 36.66





USD 9.49




Gold Fields

USD 12.95





GBP 5.82





USD 56.49




Peabody Energy

USD 32.05





USD 51.38





USD 11.35





USD 41.00





USD 18.10





MXN 199.87





USD 26.86





USD 10.00




Consol Energy

USD 39.79




Kumba Iron Ore

ZAR 187.00





GBP 6.33





EUR 186.75




Yanzhou Coal

CNY 15.39





USD 13.92




Jiangxi Copper

CNY 27.46




Norsk Hydro

USD 5.27





GBP 15.20




Shanxi Lu'an

CNY 38.83





CNY 13.21





AUD 2.62





AUD 3.15





CNY 50.24




Pingdingshan Tianan

CNY 35.37




Coal & Allied

AUD 82.00





GBP 6.56




Hindustan Zinc

INR 578.00




Randgold Resources

USD 66.01




Western Mining

CNY 14.48




National Aluminium

INR 361.00




China Zhongwang

HKD 6.85




Shandong Gold

CNY 44.22




Arab Potash

JOD 39.00





USD 10.76




KGHM Polska Miedź

PLN 71.00




Neyveli Lignite

INR 124.40




SDIC Xinji

CNY 15.18




Hebei Jinniu

CNY 35.30




Yunnan Copper

USD 21.85





USD 0.36





USD 9.46




Shanxi Guoyang

CNY 27.92





USD 500.00




Zhongjin Gold

CNY 73.57





AUD 26.37





USD 10.16





CNY 18.94




First Quantum

CAD 50.16





USD 9.22




Cliffs Natural

USD 24.78





ZAR 76.00





ZAR 126.00





CLP 11,904.00





GBP 12.76




Bumi Resources

USD 0.16




New Hope

AUD 4.67




Shanxi Lanhua

CNY 34.13





INR 79.00




Silver Wheaton

USD 9.46




Sesa Goa

INR 162.10




Hunan Valin

CNY 6.69





CNY 16.95




Shenzhen Zhongjin

CNY 17.64








Weighted averages



* 12 month

Source: market data; table compiled by Barry Sergeant