Pssst, here’s a worry from China: thirteen aluminium smelters in Henan Province (which is China’s biggest province and the centre of the aluminium industry), accounting for 20% of the country’s aluminium output, are idling 700,000 tonnes of annual primary aluminium metal capacity because of what they say are low prices and high power costs. According to a report on the official Xinhua newsagency website the smelters have been cutting production since the middle of last month. The move would cut output in the province to below 4 million tonnes (annual rate). Xinhua said the province produced more than 1.5 million tonnes of primary aluminium metal in the five months to May. That was more than 20% of the country’s total output. China’s annual output is about 6.8 million tonnes a year. Aluminium prices fell about 16% in the June quarter, according to prices from the LME.

Coal price freeze, anyone? According to another media report this week, China’s top planning body has asked the country’s coal firms to keep prices stable as the economy is facing an “arduous task” to check inflation. Coal companies were required to keep prices unchanged under annual supply contracts, and those that have increased term coal prices must reduce prices before the end of June, said Cao Changqing, chief of the department of price with the National Development and Reform Commission (NDRC). “Rising coal prices would affect downstream businesses and also lift the country’s inflation expectation,” said a statement posted on the website of NDRC. State-owned coal enterprises and other leading coal firms should take the lead in keeping prices stable, the statement noted. China is the world’s biggest coal producer but is importing more from Australia and Indonesia because it can’t keep up with demand.

Japanese steel output to rise, and fall. The Ministry of Economy, Trade and Industry (METI) has forecast that Japan’s steel industry will produce about 26.8 million tonnes of crude steel in the September quarter, up 10.6% from a year ago, but down 4.3% from the June quarter. Solid demand from Asia and from domestic car companies are the drivers for the rise in annual output, but there does seem to be a small hint of a slowing in demand. We saw overall exports in May slip from April and industrial production dip 0.1% in the same month, when it was expected to be flat. Crude steel output rose 50% in May from a year ago (the base month in 2009 was depressed though as the economy struggled out of recession).

Euro watch: The first stage of the refinancing of Europe’s banks by the ECB went off better than expected: “only” 171 banks wanted to access €132 billion in three-month money, half the forecast €250 billion to €300 billion that the market had projected. But while that news didn’t set the markets alight, it at least steadied Europe after falls in Asia. The US opened solid, sagged on poor data and then went all crazy in the last 15 minutes, dropping 100 points, rising 30, falling past 100 again to end down 96 on the Dow. Thus ended one of the more miserable quarters in the past 2-3 years, perhaps up there with the final three months of 2008. Now for the end of the €442 billion 12-month liquidity facility for 1221 European banks, which ends tonight …

Spain under review: One of the reasons Wall Street went soft was the news that Moody’s has joined the downgrade game for Spain. Well, that’s not news, seeing Standard & Poor’s and Fitch have already cut the country’s rating. Moody’s comments though make interesting reading given the continent-wide austerity drive. In short Moody’s believes that while the cuts in spending are necessary, they will deepen Spain’s woes. “Moody’s decision to initiate this review was prompted by (1) the deteriorating (short-term and long-term) economic growth prospects; (2) the challenges the government faces in achieving its fiscal targets; and (3) concerns over the impact of rising funding costs over the medium term.” Why markets were surprised is amazing, Moody’s statement was coming, they all knew it. For Moody’s to maintain its rating would have been the big shocker.

A bit of a joke: Given Moody’s move on Spain, Standard & Poor’s move to put Moody’s short-term rating on a credit watch negative verges on a bit of a joke. S&P cited a belief “there may be added risk to US-based credit rating agency Moody’s business profile following recent US legislation that may lower margins and increase litigation related costs for credit rating agencies. We are placing our ‘A-1’ short-term rating for Moody’s on CreditWatch with negative implications”. So when will Moody’s (and Fitch, for that matter, which is a subsidiary of a French group) return the favour to S&P, which is owned by publisher McGraw Hill?

Echoes of 2008: In 2008 when the real economy was dropping away and financial doubts permeated markets, Australia was held aloft by record income for iron ore and coal and the steel industries of Japan, China and South Korea. Cue 2010 and the same trend emerged last quarter. It won’t last, just as it didn’t last much longer two years ago. Look at Asia, markets are down almost 10% in the last quarter, commodities are off sharply, across the board, from copper to oil and beyond. Shanghai’s share market, down 24% in the quarter, Tokyo’s off 15%. Both are big consumers of Australian commodities. The local market is down 12%, the Baltic Dry Index is down a worrying amount, spot iron ore prices off by nearly a quarter. We should be worried, we can’t depend for much longer on the continuing surge of income from those high-priced iron ore and coal contracts? Watch for a market-worrying drop in quarterly prices for the next quarter

Blood, blood and more blood: Commodities suffered their first negative quarter since 2008 in the June quarter, the Baltic Dry Index, the key international measure for bulk shipping costs, is down 41% since May (part of a 23 week losing streak), oil, copper, gold, lead, zinc, nickel all lost ground (by 10% to 25% in the quarter). Spot iron ore prices shed 24.5% in value in the quarter. No wonder the Australian stock market lost 12% in the three months to June (but is up 8%-9.5% for the financial year). We are, after all, a commodity-based economy, tax is a second order issue to the hard heads in global investment funds. Does Julia Gillard see what is happening?

And blood overseas: The Shanghai market lost 27%, Spain ended down 22%, Wall Street 10%-12%, bonds rose by 5% to 6% in the quarter (14% for longer dated securities of 20 years or more), gold was up 13%, silver 6%. Oil lost 4.3% for the first half and 9.7% for the June quarter, which was its first losing quarter since the last three months of 2008 (when they plunged 55%). The Swiss franc about 13% against the euro in the quarter, the Aussie dollar lost 6.8% against the greenback and about 6% against all other currencies (Trade Weighted Index). The euro lost nearly 15% against the yen and more than 9% against the US dollar. Remember our bond yields are down as they are overseas. What a quarter.