World commodities demand shows signs of rebalancing

Developed economies are following China's lead and restocking their inventories

Global demand for commodities is showing signs of improvement but demand remains "modest", the world's largest mining company, BHP Billiton, said yesterday. But the market is still being pulled in both directions at once as countries struggle to adjust inventories of raw materials to the uncertain economic conditions, the group's quarterly production report said.

Steadily rising prices for key commodities such as copper and iron ore confirm the assessment that China's restocking of its inventories is "essentially complete", which will help to stabilise a vast chunk of global demand. BHP also reported rising demand from the developed economies of Europe, the US and Japan, adding: "We are now seeing evidence that restocking has commenced."

The trend is an index of growing economic confidence, as pared-down stocks are refilled in expectation of increasing activity in the near future. "The 2009 financial year proved to be very challenging, with significant demand contraction exacerbated by dramatic movements in inventory levels," BHP reported. "In the short-term we believe underlying demand trends are still being masked by de-stock and stocking activities across the value chain. However, commodity prices will be influenced by supply responses due to latent capacity currently existing in the industry."

Yesterday, the company reported higher production than was forecast across most commodity groups. The big exception was iron ore. In the 12 months to June, the enormous Pilbara mine in Australia was expected to produce 128 million tonnes of iron ore. But despite a 2 per cent rise in output, it came in about 16 million tonnes short because of delays caused by the mine's expansion programme and a series of accidents. Between April and June, the company produced just 27 million tonnes of iron ore – 10 per cent fewer than over the same period a year ago.

Copper output at BHP's Escondida mine in Chile also fell, hit by milling problems that, although partially offset by higher production elsewhere, saw the annual total of 307 million tonnes fall by 21 per cent on the previous year.

BHP's involvement in the full range of mining, from iron ore to diamonds to coal, give it a broad take on the overall state of the commodities market. Miners have been savagely affected by the recession as customers slammed the brakes on spending and relied on the backlogs in their warehouses.

For example, BHP Billiton was forced to defer delivery of 6 million tonnes of iron ore – equivalent to 5 per cent of its annual production – last November after a stockpile of up to 68 million tonnes built up at Chinese ports, with another 125 million tonnes standing idle at the country's steel mills.

The Anglo-Australian company cut its global workforce by 6,000 and in February reported that its half-year profits had been slashed by 57 per cent to just £1.8bn, despite revenues rising by 17 per cent. Following last year's hostile but ultimately abortive attempted takeover of Rio Tinto by BHP Billiton, a different kind of deal is on the table. BHP walked away in November, blaming its decision on Rio's $40bn (£24bn) debt mountain, which was accrued as a result of its top-of-the-market purchase of the US aluminium group Alcan.

BHP's withdrawal sent Rio into the arms of Chinalco, the state-owned Chinese company, but shareholder opposition and the improving economic outlook killed off the deal. Instead, Rio conducted a $15.2bn rights issue and formed a joint venture with BHP sharing the two companies' Pilbara assets return for a $5.8bn lump sum.