Gold News

China's Slowdown Problem for Iron Ore

Junior iron-ore miners think they'll be fine once price recovers. But...
SO IN AN article in the Weekend Australian by Adam Carr, he argued that the Aussie economy was actually getting stronger, not weaker, writes Greg Canavan in The Daily Reckoning Australia.
I have my doubts about that. Which is why I asked those readers running small or large businesses to send in a few lines to tell us what you think.
Funnily enough, a few days later I saw another one of Mr.Carr's articles. He was arguing that if the high iron ore price didn't cause a boom on the way up, then it wouldn't cause a bust on the way down.
The problem with that line of thinking is that it did cause a boom on the way up. A boom that the RBA had to control with the highest interest rates in the developed world.
Now that we're well and truly in the iron ore price bust phase, the RBA is cutting faster than Edward Scissorhands to control the fallout.
But the RBA can't control the fallout from the iron ore bust. All it can do is promote the structural retardation of the Aussie economy. That means encourage more and more capital to funnel into property speculation at the expense of genuine, productivity enhancing investment.
That's why Aussie mortgage and household debt is now at a new record high as a percentage of the total economy. We're leveraging further into an iron ore price collapse!
The RBA certainly can't control the Chinese economy either, which continues to cast a dark shadow over the Aussie economy and the stock market.
China's economic growth numbers, along with a host of other data, saw the market fall sharply despite GDP being bang on target at 7% growth (fancy that). But the 7% growth number so widely reported was for the year to 31 March. The actual March quarter number came in at just 1.3%, or 5.2% annualised. For China, that's a rapidly slowing rate of growth.
Make no mistake, China is slowing fast. It's probably why the Australian stock market sank on the news. Even Shanghai didn't buy the 'bad news is good news' line. It fell 1.24%.
All this weak Chinese data is a part of the country's necessary structural adjustment. It will likely go on for years. If you're lucky, China will be able to manage the slowdown without an unemployment blowout and major political instability.
Whatever happens though, there will be no luck for the iron ore miners in the future. They cashed it all in during the boom years.
The Financial Review dug into China's fixed asset investment numbers, which revealed some ugly truths for the iron ore sector.
"The area of land sold in the first quarter – a key indicator of future construction and steel demand – fell by 32.4 per cent from the same quarter last year.
"The stock pile of new homes, yet to be sold, increased by 24.6 per cent over the same period. That left the total area of newly completed residential property at 650 million square meters or around 6.5 million apartments.
"The figures neatly demonstration the acute over-supply of property across the country, which has many forecasting iron ore demand to fall by around 5 per cent this year.
"Residential property construction accounts for around 20 per cent of Chinese iron ore demand."
As ugly as that looks for iron ore, no one in the industry seems to care. The delusion levels are still at all-time highs. The juniors think if they can just hang on until the price recovers, they'll be fine.
The problem is, there will be no price recovery until the juniors and all their production exits the market.

Greg Canavan is editorial director of Fat Tail Investment Research and has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as and the Sydney Morning Herald.

See the full archive of Greg Canavan.

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