Last month, the Shanghai Composite Index slipped for the second time this year and rattled markets worldwide. On April 19th, the index dipped 4.5% which was not nearly as great as the 8.8% on Feb. 27th. The market reacted to an announcement from China’s statistic’s bureau saying that the country’s gross domestic product grew by 11.1% in the first quarter. The bureau also released numbers (inflation and investment) that suggested the Chinese economy could be expanding too rapidly. For the last four years, it has grown at 10% or more. Thinking that the government would raise interest rates to cool the economy, Chinese investors began to sell.

One of the many differences between the mining sector and other industries is that our livelihoods thrive on increased Chinese consumption. Chinese ore buyers are keeping prices high. China is the largest exporter and the country depends on mining companies to supply the raw materials it needs to sustain that growth. China’s trade surplus doubled to $46.4 billion in the first quarter of 2007. As it piles up stock abroad, it creates tensions especially in the U.S. and Europe. When manufacturing industries complain of inexpensive Chinese imports and governments talk about isolationism, the mining companies are quietly cheering for continued Chinese success and looking forward to growth in other Asian countries.

Because the Chinese have limited investment options, the Shanghai Composite Index serves as an economic barometer. Even though the index quickly regained steam, the April drop did have an impact on other markets. Oddly enough, Americans shrugged it off. The Chinese government’s efforts to hold inflation at bay may eventually hurt the U.S. economy, as it relies heavily on China as a lender and a trading partner. Likewise, some analysts believe a rate hike would depress commodity demand in the long term.

Changes in the Chinese economy could work for and against the mining business, depending on one’s perspective. Investors look at gold and other precious metals as safe havens during times of market instability and a weaker dollar could push prices higher. Gold producers with balance sheets based on the dollar would reap higher returns. Other gold producers, such as those in South Africa where the rand has improved on the dollar, would not share as high a return. For base metals, which is much more of a straight-forward supply-and-demand scenario, a dip in Asian markets could lead to softer futures for metals prices in the short-term—a knee-jerk reaction by commodities analysts.

The reality, however, is that strong growth numbers for China today point toward continued success for miners worldwide tomorrow. Stocks are low and demand is high. One problem at any of the major mines—whether it be labor unrest, difficult geology, or some other unforeseen problem— will only further constrain the market. If miners can dismiss dips in the Asian markets as small corrections in an overall growing trend, then they can easily look forward to growing demand and a healthy market.

Steve Fiscor, Editor-in-Chief, E&MJ