The Worrying Signs in China’s Economy for Aussie Miners
It was not an impressive start to the week for the Australian share market. But life is full of second chances. And today, the Reserve Bank of Australia meets to fix the price of money. Perhaps the RBA will say something about lowering interest rates that will lift investor's spirits.
It's quite a big 'data' week in Australia, if that's the sort of thing you're into. Fourth quarter GDP figures will be released on Wednesday. And then on Thursday the January trade figures will be made public. That's the one we're watching.
As you may know, 30% of Australia's exports go to China's economy (in value terms, not volume terms). No other major industrial economy is more dependent on exports to China than Australia. Any sign that China's demand for Aussie metals, ores, and coal is waning won't be welcome news.
The Chinese Property Market
Meanwhile, in China, the shares of property developers were smashed yesterday. It was a direct reaction to the crackdown on lending by China's regulators. The State Council also announced a 20% capital gains tax on home sales.
The Shanghai Composite Index fell 3.7%. But it was the property developers who copped the biggest whack. Shanghai Industrial Development, for example, fell 10.5%. Ouch.
Shanghai property prices were up 41% year-over-year for the first two months of the year, according to Chinese real estate firm Soufun. The median home price in Shanghai is now 45 times the median wage. That's expensive, even by Australian standards.
Even the head of China's largest property development company agrees that Chinese real estate is in a bubble. 'Yes, of course,' answered China Vanke founder Wang Shi answered. The question, on the US-news show 60 Minutes, was whether China had a property bubble. China Vanke's shares were down 6% yesterday.
China's Bubble Trouble For Aussie Miners
Despite the worrying signs that China's economy has an old-fashioned monster credit bubble on its hands, Aussie iron ore firms are forging ahead with plans to dig up more red dirt. Commonwealth Bank analyst Andrew Hines reckons there will be $213 billion in combined capital spending by BHP, Rio Tinto, and Fortescue between 2013 and 2020. More than half of that, or about $107 billion, will be spent in Australia.
For example, Rio Tinto hopes to ramp up annual iron ore production from the Pilbara to 410 million tonnes per annum (mtpa). BHP is targeting 204 (mtpa). Fortescue is targeting (155mtpa). It's figures like this that prompt HSBC's Paul Bloxham to say 'the mining story is not over yet and the death of the mining boom has been greatly exaggerated.'
It's hard to exaggerate a fact. The fact is, mining booms are cyclical. As we pointed out yesterday, booms in capital spending happen closer to the end of the cycle than the beginning. All this investment is based on projected demand. Those projections are invariably optimistic at the top of the cycle.
To be fair, those three iron ore producers are the lowest cost producers with the highest quality ore. Iron ore prices don't need to be $100 for BHP and Rio to make money. It's the mid-tier producers with higher costs and lower quality ore that need the price boom to stay competitive. These companies have effectively gone 'all in' on the China boom story.
Regards,
Dan Denning
for The Daily Reckoning Australia