Metals & Mining : China, Metals and Mining, one foot down but more under the belt?

China’s weight in and its influence over the global economy are undeniable . Bear in mind that China: ( 1 ) represented 16% of global GDP in 2018, up from 7% in 2008; ( 2 ) is the world ’s largest exporter (in value) and the second-largest importer after the United States; and ( 3 ) its economy is set to grow by 6.3% in 2019 on our estimates, compared with 2.0% for the United States and a modest 1.1% for the Eurozone. To underline its role as the global economic powerhouse, it will be recalled that, as regards Metals & Mining , China was (1) the world’s leading steel producer (52% compared with 38% in 2008) in 2018 and (2) the largest importer of iron ore, cobalt as well as copper . Given China’s weight in Metals & Mining, the slowdown in Chinese growth expected in 2019 -2020 (from 6. 6 % in 2018 to 6. 3 % in 2019 and 6.2% in 2020 – see Natixis Table Forecast ) suggests that the sector should be penalised . Bear in mind that the nominal growth figures probably mask a more pronounced slowdown . On the occasion of the G20 Summit in Osaka, the United States and China agreed to restart talks over recently introduced custo m s tariffs . While tensions can be expected to subside, our view is that given the major bones of contention, the best that can be hoped for is a truce in the trade war and the start of a new round of trade talks. In the short term, uncertainties are likely to persist and weigh on the Chine se economy’s dynamism . At the same time, one should not overlook the positive impact that should be generated by the massive investments generated in connection with the “ Belt and Road Initiative ” (BRI). Natixis ( see “ The impact of China’s Belt and Road initiative on commodities ” ) estimates that the chief beneficiaries will be the steel, copper, zinc and aluminium sectors . While attending the China Development Forum in March, BHP’s c hief executive indicated that BR I implementation was expected to lead to an annual increase in demand of 9% for steel and 7% for copper over the next decade, in China and along the length of the BRI (i.e.   project partner countries and their neighbours). Issuers in the copper segment (Glencore, BHP) and iron ore segment (Vale, Rio Tinto) are the ones most exposed to an eventual slowdown of the Chinese economy . Even based on a worst-case scenario (10% drop in prices and volumes in 2020-2021), the negative impact on EBITDA would be contained. Vale would be the only issuer to experience a deterioration in leverage. This, combined with the headwinds faced by the group in Brazil (decline in production, litigation costs), could prompt S&P and Fitch to follow Moody’s lead of last February and downgrade their ratings (BBB- currently in both cases).