Russia Forum Buzz – Commodities: Pendulum Swings

February 4, 2011


Artem Volynets said Russian exports to China will grow rapidly, while Chinese investments will fuel infrastructure development, especially logistics. He pointed to the rally in coal prices as an indicator of continuing growth in power demand, which Russia could satisfy by leveraging its Siberian hydro power. To capitalize on China’s growing appetite for commodities, Russia needs infrastructure and trust. China has invested $60 bln in Africa and only $8 bln in Russia.

Peter Hambro pointed to bad policies and inflation around the world as the driver for the continuing rally in gold, which offers a “wealth insurance” of sorts. He also supported the view that Russia-China trade has a great future, the Amur River being so easy to cross. For Petropavlovsk, getting better recognition from Chinese investors would open access to huge sources of capital to finance capex development.

Eduard Potapov, speaking of plans for 2011, said Metalloinvest is going to continue expanding into the Chinese market, which still offers exciting growth opportunities created by an increasing proportion of urban population and rising income. Infrastructure bottlenecks are the main obstacle for iron ore producers, leading to very high transportation costs. Russia needs to import new technologies and Western experience to deal with this challenge.

Andrey Ilyin said demand for fertilizers has stronger fundamentals than many other commodities, as the growing affluence of the population is fueling growth in fuel consumption. Some correction in commodity demand is coming, but probably still five to six years away. He expressed concern about how much capital the Russian mining industry does not get because of regulatory issues and the investment climate.

Justin Baring suggested watching companies as they allocate capital for development to see where the growth is. He emphasized the supply potential of Russian miners that can be detrimental to pricing in the long run, but mentioned that this supply was still many years away. Strangely, no Russian exploration companies are knocking on the doors of investors today, which possibly points at problems down the road.

Answering questions from the audience, the speakers largely dismissed the risk of overstocking for commodity prices, being comfortable with the demand from China. Speaking about the relative merits of investment in Africa and Russia, speakers pointed at higher risks associated with many African countries and the early stage of development of existing projects. Africa is not seen as a significant force on commodity markets. No changes are expected in the taxation regime, as the government’s priority is to create a favorable investment climate, although certain risk always exists. Russian miners are naturally hedged against adverse exchange rate volatility, as the ruble correlates with commodities.