Mining companies are faced with collapsing demand and are responding by doing the wrong thing: digging more raw materials out of the ground.

So says Tom Maverick, a writer for Wall Street Daily who scrutinizes the metals industry and China’s shrinking appetite for iron ore, copper, zinc and nickel.

“Logic would dictate the miners cut back production. So does Economics 101,” he writes in a Seeking Alpha blog post. “But the managements at the big three continue to live in a fairy tale.”

The big three mining companies are Rio Tinto PLC, BHP Billiton and Vale SA, which have a combined market value of $182 billion. The companies have suffered double digit stock losses since the beginning of the year as the prices of raw materials touch multiyear lows.

Maverick says miners are far too optimistic about the demand from China.

Miners “continue clinging to their forecast — that Chinese steel output will rise 20% over the next decade — like drowning men to a life preserver,” he says. “In fact, Rio Tinto still forecasts that annual Chinese steel production will hit a billion tons by the end of the decade.”

China kept adding to its steel production as the country underwent a massive transformation to an industrial economy. Crude steel output rose more than 12-fold between 1990 and 2014, Maverick says.

“Thanks to overcapacity, the Chinese steel industry has shifted into reverse in a big way,” he writes. “Prices have fallen by nearly 30 percent.”

Miners need to cut back their capacity, and soon, to support prices and avoid major losses.
“Iron ore, for example, the price is quickly approaching the break-even level for some of the big miners. This is despite falling freight, oil, and currencies helping to lower miners' costs,” he says. “Until the permanent shuttering of mines occurs, the sector will remain in its downward spiral.”

While China’s demand for industrial metals is falling, the country’s appetite for precious metals like gold has grown.

China likely boosted central bank gold reserves in November by about 21 metric tons, the most in at least five months, as prices had the biggest drop in more than two years, Bloomberg News reports.

“The value of gold assets was $59.52 billion at the end of last month from $63.26 billion at end-October, according to data on the People’s Bank of China website released Monday,” according to the newswire. “That works out to 56.05 million troy ounces or about 1,743 tons, based on the London Bullion Market Association afternoon price auction on Nov. 30, Bloomberg calculations show. The stash was 55.38 million ounces a month earlier.”

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