Fears of China: a summing-up
Published by MAC on 2012-03-27Source: Business Spectator, BN Americas, Reuters
Are the bubbles already bursting?
Speculation that China's leadership has been methodically "cooling its economy" in recent years received confirmation last week.
The world's third biggest iron-ore exporter, BHP Billiton, warned that the country's demand for steel's raw material is "likely to flatten out".
And a Barclays Capital economist declared that China has now become "the least supportive factor for copper prices".
While China recorded GDP growth of 9.2% in 2011 and annual growth has averaged 10.4% since 2001, the latest government target calls for economic expansion of only 7.5% this year.
A decade ago, the mining industry set its cap at the Peoples Republic as the world's most vital single market for ferrous and nonferrous metals, fuel minerals and construction materials. More recently China has become the leading producer and consumer of gold.
However, by 2009, the state leadership had already introduced measures to reduce consumption of coal, shutting down numerous small, dangerous pits, and increasing the efficiency of thermal power plants. See: Is China's carbon tax proposal merely "political theatre"?
Polluting steel foundries were also "consolidated".
These steps haven't materially reduced overall demand. On the contrary, the rising middle classes want more and better housing, and access to consumer goods.
Nonetheless, the regime also began limiting exports of finished products - notably to Europe and the USA - in order to balance its huge trading deficits.
At the heart of the Chinese economic malaise is the boom in property prices. This is now seen as a potentially huge and damaging "bubble", and not just because it's threatening fiscal stability.
The mad rush into real estate, and infrastructure to service huge building programmes, has also placed hundreds of thousands of citizens at risk of losing their land, rivers and amenities, thus triggering mass protests across the country. See: Thousands protest coal-fired power plant
It's not difficult to predict that, if China's property sector is "tamed", then demand for its key "building blocks" - steel, aluminium, copper, zinc, cement and fossil fuels - will also be significantly curtailed.
Taken in tandem with a curb on mineral-derived exports, BHP Billiton and other natural resource extraction companies should be alarmed that Beijing’s efforts to "cool" the economy may soon put them out in the cold.
When the bubbles burst
Two years ago, economics Professor Martin Hart-Landsberg issued a stark warning.
In the first half of 2009, he pointed out, Chinese state banks loaned three times more than in the same period in 2008.
Approximately half of these loans had gone to financing property and stock speculation, "raising incomes at the top while fueling potentially destructive bubbles."
And, said Hart-Landsberg: "Much of the other half has gone to finance the expansion of state industries like steel and cement, which are already suffering from massive overcapacity problems.
"It is difficult to know how long the Chinese government can sustain this effort. Property and stock bubbles are worsening. Overcapacity problems are driving down prices and the profitability of key state enterprises. Both trends threaten the health of China's already shaky financial system."
But, even more threatening could be the deepening mass resistance to existing social conditions: "The number of public order disturbances continues to grow, jumping from 94,000 in 2006 to 120,000 in 2008 and to 58,000 in the first quarter of 2009...
According to Hart-Landsberg, the nature of labor actions has also been changing. In particular, workers are increasingly taking direct action, engaging in regional and industry wide protests, and broadening their demands.
"While this development does not yet pose a serious political threat to the Chinese government, it does have the potential to negatively affect foreign investment flows and the country's export competitiveness, the two most important pillars supporting China's growth strategy.
Hart-Landsberg concluded with a severe warning: "The Chinese Government's determination to sustain the country's export orientation means that it can do little to respond positively to popular discontent.
"In fact, quite the opposite is true. In the current period of global turbulence the government finds itself pressured to pursue policies that actually intensify social problems."
[See: International Journal of Socialist Renewal, February 2010]
Has Beijing - and indeed the global mining industry - now learned this vital lesson?
The sum of all China fears
Karen Maley
Business Spectator
21 March 2012
Astute China watchers have long fretted that the Chinese government's determination to push housing prices down could trigger a sharp slowdown in the world's second largest economy.
Their worries appear to have been justified after mining giant BHP Billiton's warning that Chinese demand for iron ore is likely to flatten out due to the cooling in the Chinese economy.
It's certainly clear that China's property market - which has long been an engine of the country's economic growth - has slowed sharply as a result of tighter monetary conditions, and Beijing's efforts to combat rising property prices by pushing up deposit requirements, and introducing restrictions on people buying their second and third homes.
In January and February this year, the value of property sales was 20 per cent below the level in the same two months of last year. This is the heaviest drop in sales since the Chinese property slide in 2008.
At the same time, the latest figures on property prices show that prices fell in February from January in 45 of 70 cities. The average decline across the cities is now around 1.5 per cent year-on-year, which again is the sharpest decline since 2008.
But the Chinese government isn't resting on its laurels. It clearly wants to see steeper declines in property prices in order to stave off social unrest. Last week, Chinese Premier Wen Jiabao sparked a sell-off in the Chinese stock market by saying that Chinese house prices remained too high.
Speaking at a nationally televised press conference, he said that "home prices are still far from returning to reasonable levels, and as such, regulation cannot be relaxed." If controls were relaxed at this point, he warned, there would be "chaos in the real estate market".
Many economists are worried that an even deeper slowdown in the Chinese property market - and some are tipping that Chinese housing starts could drop by up to 15 per cent this year - will cause major ripples throughout the Chinese economy, particularly for construction-related industries such as steel.
At the same time, a sharp slow down in the property sector will put even more pressure on the finances of the local governments - which depend on property sales for at least half of their revenue. As the Chinese property market has deteriorated, the revenues of local governments are being tightly squeezed, and this could force them to scale back their plans for infrastructure spending, which will further dampen growth.
The crackdown on property prices comes at a time when there are clear signs that China's exports are clearly being hit by the spreading recession in its largest export market, Europe. At the same time, the disappointing levels of bank lending suggest that the slowdown in China's domestic economy could be steeper than most analysts are expecting.
According to figures from the People's Bank of China, banks made 1.4 trillion yuan of new loans in the first two months of the year, which represents less than 20 per cent of what analysts estimate is the central bank's annual lending target of 8 trillion yuan. Now, Chinese banks typically lend heavily in the early months of the year, with loans in the first two months usually accounting for 25 per cent of their total lending for the year.
Although the Chinese central bank was quick to cut the reserve requirement ratio in order to encourage the banks to lend more, some economists argue that the major problem is that demand for new loans is beginning to dry up.
They argue that Chinese companies are now responding to the problems in the property market, the slowdown in the domestic economy and the darkening outlook for exports by scaling back their investment plans. And their concerns appear to be reflected in the latest lending figures. Typically around half of the loans made by Chinese banks are medium-to-long term loans (for major investment projects). In the first two months of the year, Chinese banks only lent 25 per cent for longer-term projects, and made up the shortfall by bulking up on shorter-term trade finance loans.
However, with the major transition in the Chinese leadership due to take place later this year, the risk is that the Chinese government will be preoccupied with engineering a reduction in property prices in order to promote social harmony and that it will be slow to respond to signs that the Chinese economy is slowing sharply.
China is currently least supportive factor for copper, analyst says - Regional
By Victor Henriquez
Business News Americas
21 March 2012
China has become the least supportive factor for copper prices, mainly as a result of weak physical demand during Q1, analyst Nicholas Snowdon from UK-based investment bank Barclays Capital told BNamericas.
"There are certainly good reasons to be cautious on the outlook for Chinese copper demand, given the combination of current soft physical market indicators and ongoing impacts from weakness in the property sector," Snowdon said.
"However, we should not forget that Q1 is a seasonally weak period for demand and Q2 will likely see a pick-up in activity, and anecdotal evidence is already filtering through of an improvement in order books," he added.
China's recent downgrade to its 2012 GDP growth target to 7.5% was in line with consensus and was not a big surprise, according to the analyst. "Moreover, history has taught us that such targets are often surpassed in reality."
The move does, however, show that the Chinese government is not considering a sizeable stimulus or aggressive easing in 2012, although this had also been well signaled already, according to Snowdon.
"Support for copper prices has been coming from the generally positive outturn in macroeconomic data quality so far this year," he said.
Policy action taken in Europe has apparently pulled back the debt crisis from tumbling over the precipice, while fears of a US recession and hard landing in China have also dissipated to some extent.
"From a copper fundamental perspective, the continued decline in LME stocks to the lowest level since July 2009 as well as an elevated level of cancelled warrants point to tightness in the primary market in the US and Europe, which is also supportive for prices," Snowdon said.
Following a surge at the beginning of this year to slightly above the US$3.9/lb mark, the red metal has been trading at around US$3.8/lb during March.
Some analysts are forecasting prices will return to the uptrend throughout the year to reach US$4.1/lb, while others believe prices will correct down, mainly as a result of further slowing in China's economy.
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Investors give miners another kicking after China manufacturing shrinks
Frik Els
Mining.com
22 March 2012
None of mining's top companies escaped the carnage on Thursday after a survey of manufacturing in China showed the sector contracted in March.
Investment bank HSBC's preliminary Purchasing Manager's Index (PMI) dropped to 48.1 from 49.6 in February, the fifth straight monthly decline. A reading below 50 indicates shrinking activity.
"Growth momentum could slow down further amid a combination of sluggish export new orders and softening domestic demand. This calls for further easing steps," Qu Hongbin, HSBC's chief economist for China said in a statement.
China, the world's second largest economy, dominates the global trade in iron ore (representing 60% world trade) and base metals including copper (38%), coal (47%), nickel (36%), lead (44%) and zinc (41%).
By early afternoon on Thursday in New York, BHP Billiton's ADRs were down 2.6%, bringing losses at the number one miner over the last three trading days to 6.7% representing more than $10 billion in lost value. BHP was ranked the 6th most valuable corporation across all sectors in 2011 with a market worth above $200 billion.
Stock in Brazil's Vale and Australia-based Rio Tinto, number two and three diversified resources companies, were also pushed down. Rio Tinto lost 3.9% on Thursday and now trades a whopping 8% lower than at the start of the week. Vale shed 2.4% on Thursday. Both Vale and Rio are worth more than $100 billion.
$51 billion Anglo-American lost 2.3% in New York, while Swiss-based met coal giant Xstrata were 3.7% cheaper in New York after its London-listed shares closed down 3%. Swiss commodities trading giant Glencore, currently locked in talks about a possible takeover of Xstrata, gave up 2.9%
The manufacturing activity numbers were the latest in a string of bad news from China.
On Tuesday, billions were hacked off the globe's biggest mining companies on comments by BHP Billiton over weakening demand for iron ore from the Middle Kingdom.
Earlier this month trade data from China showed a deficit that was the largest in 12 years and the country's GDP growth is expected to fall to an 8-year low.
China recorded GDP growth of 9.2% in 2011 and annual growth has averaged 10.4% since 2001, peaking in 2007 at 13%, but the latest government target calls for economic expansion of 7.5% this year.
No iron ore buying rush seen when China reopens
By Manolo Serapio Jr
Reuters
4 April 2012
SINGAPORE - Chinese steel mills are unlikely to snap up iron ore cargoes in the spot market when China returns on Thursday after a three-day break, with a blurry demand outlook capping steel prices, traders said.
The physical market for the steel raw material has been extremely quiet this week with top importer China off since Monday for a public holiday.
There was also limited liquidity in the forward swaps market, helping exaggerate the upward price movements.
"I don't think you're going to see a rush of buying tomorrow from Chinese mills in the physical market," said a Singapore-based iron ore trader.
"It's going to be very difficult for the market to climb $5-$10 if steel prices don't move because it doesn't make financial sense for anyone to buy more ore."
Iron ore with 62 percent iron content .IO62-CNI=SI steadied at $147.60 a tonne on Tuesday, according to Steel Index, holding near the five-month peak of $147.70 touched last week.
"With China still on holiday, no one was looking to buy or sell spot iron ore," Steel Index said.
There was very little action in the swaps market in Asia on Wednesday, with Hong Kong also away on a national holiday.
Swaps extended price gains on Tuesday, with the Singapore Exchange-cleared April contract at $146.87 a tonne, May at $143.87 and June settling at $141.87.
With the swaps market still in backwardation, where prices for nearby delivery are higher than for forward months, the continued price gains are not necessarily pointing to expectations of higher spot rates, traders said.
"It's more a reflection of two things. Firstly a bit of a short squeeze and the fact that we had very poor liquidity over the last few days which accentuated movements," said another trader in Singapore.
"There's not a lot of room for spot rates to go with steel at current levels."
Spot steel prices in China have mostly stabilised, but have been struggling to go higher amid sluggish demand, with steel inventories dropping at a slower than expected pace.
Steel inventory at Chinese traders has fallen 6 percent since peaking six weeks ago, according to recent estimates by investment bank Macquarie. But over 2007 to 2011, inventory fell an average of 14 percent six weeks after the first-quarter peak, the bank said.
(Reporting by Manolo Serapio Jr.; Editing by Sugita Katyal)