Miners are blind to China's new reality
Published by MAC on 2013-04-28Source: Business Spectator
But the writing's on the wall
Yet another warning has been sounded that mining companies shouldn't rely on Chinese demand for their output, to anything like the extent of recent years.
Although the industry is now engaged in "cutting costs" at some existing projects, or suspending new ventures, many companies seem oblivious to this reality. As we commented last week:
"[T]he greatest threat to Rio Tinto's future economic prosperity is the continuing fall in Chinese demand for the company's core minerals. It's likely this will never again prop up the company's bottom line to anything like the extent it did during the first decade of the new millennium".
Miners are blind to China's new reality
Robert Gottliebsen
Business Spectator
26 April 2013
Last night we saw copper and other commodities recover ground because markets believe we are going to see another round of stimulation.
And it is possible the markets will be right but it's important to understand some of the deeper forces behind the recent declines which have sparked the big fall in mining shares despite this week's recovery.
A KGB interview with Patrick Chovanec, to be published on Monday, helps explain why Australian mining shares have fallen so far.
Right now Chovanec is the chief global strategist of Silvercrest Asset Management but he has just completed a five-year-term as a professor at the Tsinghua University's School of Economics in Beijing.
Chovanec believes the situation in China is more serious than is generally understood in Australia. And it is certainly a lot more serious than the position painted by our Prime Minister Julia Gillard at the ADC China Summit and in her KGB interview. In essence Chovanec says that the great growth rate in China's demand for minerals that Australia has seen in the last four years is simply not going to be sustained.
At best we will hold steady but demand could easily fall quite a lot. China invested vast sums via its official and secondary banking systems in infrastructure and other projects which have proved to be uneconomic.
Most of the projects were funded with borrowed money and now we are seeing interest rates of eight to twelve per cent in Chinese short term securities as the capital markets scramble to fund these exercises.
A big portion get that the growth in China's credit is required to simply fund the extra costs involved in the interest rate burdens of this enormous expenditure. And to the extent that credit is being created for new projects, those projects are simply not delivering the sort of growth that we have seen in the past.
At the same time exports to the US are struggling in some areas because of the rise in American manufacturing and China is also seeing increased automation - both events are causing labour retrenchments. All this adds up to a correction in China. A minor correction would be very healthy but it could become more serious if the Chinese encounter difficulties in managing it.
Alternatively, they may attempt to do what the Japanese did and hide the problem under the carpet in which case at some point of time it will explode into a very nasty recession.
All the above forces compound into the fall in commodity markets and our mining shares. Unfortunately Australian miners have become among of the highest cost of the world and unless there is a breakthrough in our cost structures we are going to cut off most of the new projects that have not been started.
For what it is worth I believe that banning of cartel-style agreements in building and mining areas is the first step in reducing our costs. But pain involved in regaining that competitiveness will be high and unfortunately the first step in that process is the fall in mining shares - which forces companies to look hard at their costs.
Iron ore under pressure as China steel output curbs loom
Manolo Serapio Jr
Reuters
29 April 2013
SINGAPORE - Spot iron ore prices are likely to slip further this week as softer steel demand may prod Chinese steel mills to curb output, although a shorter trading period in Beijing will limit market activity.
China's steel industry body on Saturday warned that an anticipated rise in demand would not be enough to justify sharp increases in production by the country's steel mills -- world's biggest iron ore buyers -- in coming months.
"Downstream demand will gradually improve, but at the same time it is difficult to see any relatively big rises in steel consumption, and the expectations of steel firms should not be too high, and they should not blindly expand output," Zhu Jimin, chairman of the China Iron and Steel Association, said on Saturday.
China's daily crude steel output has stayed near record highs above 2 million tonnes since mid-February as producers banked on demand that typically peaks during the second quarter.
But a tepid economic recovery in China also meant a slow pickup in steel demand.
"The mood is generally bearish. Mills are keeping their iron ore inventory low because I think they are considering production cuts in the future," said an iron ore trader in Hong Kong.
Stockpiles of iron ore at major Chinese ports rose slightly to above 68 million tonnes last week, data from industry consultancy Mysteel showed, reflecting slack demand from domestic mills.
"The fact that the port stocks haven't really been moving shows there is not a lot of buying interest," the Hong Kong trader said.
Benchmark 62-percent grade iron ore eased 0.4 percent to $134.10 a tonne on Friday, matching a low last seen on March 20, based on data from the Steel Index.
The commodity dropped nearly 3 percent last week, its steepest such loss since mid-March. Prices have fallen in nine of the last 10 sessions.
Chinese markets are shut from Monday to Wednesday for public holidays.
(Reporting by Manolo Serapio Jr.)