Where Next For Mining Shares?

Last year, Morgan Stanley said ongoing Chinese consumption of commodities may result in sustained deficit in some key areas. It reckoned that this may lead to commodity prices remaining higher for longer. Mind you, they also pointed to short-term nervousness though they stressed that any short-term correction may be short-lived.

It seems the clever clogs at Morgan Stanley have been spot on with their predictions thus far. Commodity prices appear to have largely defied gravity with metals such as tin, platinum and nickel touching all-time highs. But nervousness over high commodity prices has also seen shares in Anglo American (LSE: AAL) fall back from a high of 2,549p to 2,095p, and Rio Tinto (LSE: RIO) is down 15% to 2,878p. Elsewhere, Lonmin (LSE: LMI) is 18% off its high of 3,093p but this is unlikely to dent its chances of gaining promotion to the FTSE 100 later this week.

So, given that mining shares have fallen significantly of late is this a good time to pick up some mining bargains?

Almost certainly what happens in China may provide important clues as to the direction of commodity prices. And by and large, Chinese industrial growth is showing little sign of abating, and this may lead to robust demand for steel. This is likely to underpin not only prices for iron ore but also for coking coal. Some of the main beneficiaries here include coal suppliers such as BHP Billiton (LSE: BLT), Rio Tinto (LSE: RIO) and Xstrata (LSE: XTA). Interestingly, integrated steel producers need high quality coking coal, which is limited. Consequently, it is anticipated that supplies may be constrained until such time that steel production moderates.

Demand for steel can have an impact on zinc, too. This is because the most important application of zinc is to protect steel from corrosion. In the past, China has been a significant exporter of zinc, but this has not been the case since 2004. Additionally, some key mines are now approaching the end of their useful lives, which suggests that demand may continue to outstrip supply. This may benefit Vedanta Resources (LSE: VED), which generates over half its profits from zinc.

China is also the main driver for global copper consumption. And growth in demand for the metal has been estimated to be around 10% a year. Whilst there are positive signs that copper miners are lifting production, demand is still expected to exceed supply for another two or more years. Some of the key players here include Antofagasta (LSE: ANTO) and Kazakhmys (LSE: KAZ).

It appears that not much has changed since Jim Rogers predicted that commodities prices may rise for some time. He reckoned that the current bull-run for commodities, which started in 1999, may run for 17 years. On that basis, miners may continue to bask in high commodity prices for another 10 years. On the flipside though, Bill Miller reckons that "The time to own commodities is when they are down, when everybody has lost money in them, and when they trade below the cost of production."

Both Bill Miller and Jim Rogers are big hitters in the investment world, and what they have to say can carry considerable clout. However, I am inclined to side with Jim Rogers this time because I cannot see who or what can stop China from growing.

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