EDITORIAL — Metals demand hangs in balance — Paper Asian tigers

For much of the past decade, the mature economies of Europe and North America have taken a back seat to the outstanding growth performance of the so-called Asian tigers. Yet few perceived the structural weaknesses underlying the economies of Thailand, Korea and other neighboring tigers, and fewer still predicted their slowdown in export growth, or were aware of their inflated property markets, persistently large current account deficits and rapidly rising debt-loads.

Now that the bubble has burst, the world is painfully aware that much of Southeast Asia’s private-sector growth in recent years was fueled by unhedged foreign currency denominated borrowing. This, in turn, weakened domestic currencies and overexposed the weak banking system. The crisis that began in Thailand spilled over into neighboring countries, many of which had the same structural problems.

The International Monetary Fund (IMF), which had warned Thailand and other nations of their underlying deficiencies, is now taking necessary corrective actions. However, it may be years before the positive effects of reforms are felt and before lost confidence is restored. And confidence will never be fully restored until some of these nations better recognize their place in the global economy and take steps to improve the flow of accurate information so that markets can assess the extent of the problems and the success of the measures introduced to correct them.

After all, the lack of transparency about the true state of these economies (and the full extent of the cozy links between banks, industry and government) masked the problems for longer than would be the case in the more open Western nations. Reforms will have to include not only measures to improve governance, but also greater transparency and accountability.

Indonesia is a case study of a nation whose economy is plagued by these sorts of problems. The Busang affair, as played out on the world stage a year ago, was a mirror in which the world could see the incestuous relationship between government and business. Who can forget the sorry spectacle of two of President Suharto’s grown children vying to have their share of the Busang fool’s gold deposit.

Indonesia has agreed, however, to implement reforms associated with a multi-billion-dollar bailout package from the IMF. In return for those funds, the country will carry out a major restructuring of the financial sector and introduce deregulation measures and trade reforms to improve its economic foundation.

The Southeast Asian economic crisis will have serious consequences for the metals and minerals sector, at least in the short term. For proof of that, one need look no further than the current nickel markets. Nickel is highly leveraged to demand in this part of the world, and the low price for this commodity already reflects the expectation that demand will be lower than once anticipated for the rest of this decade.

The International Bank Credit Analyst, which provides a monthly forecast and analysis of currency movements, interest rates and market developments in numerous countries, notes that recent developments are forcing a downgrading of growth expectations for developing Asia, from an average in the 6-8% range to the 2-4% range — a decline of some four percentage points. Because these countries constitute more than 20% of the world economy, this would reduce global growth by close to one percentage point, from around 4% to near 3%. “The prevailing global winds are deflationary,” the publication reports, adding that “the Asian shock has the potential to open up a modest disinflationary gap for the world as a whole.”

The final years of this century will be interesting and challenging times for those companies which produce metals and minerals. No doubt, only the fittest will survive.