Stand by, the still-slowing Chinese economy’s search for a soft landing is starting to get bumpy, and Australia’s trade account faces increased pressures over the rest of the year. At the same time, the impact of the easing in China is being amplified by the US fracking gas boom. As a result, prices of our two key exports, iron ore and coking (metallurgical) coal are being pressured lower.
While the latest data from China late last week pointed to an economy still growing, the quality of that growth has not improved in the past three months. The monthly release of production, investment, bank lending, retail sales, import and export figures for July were all less than expected and in most cases, a touch weaker than in June. July consumer price inflation, which fell to an annual rate of 1.8%, was better than expected. And wholesale prices for business are now contracting at an annual rate of 2.9%, and that deflation will start impacting business profits in the next few months, which in turn will put further pressure on demand, unless the central government boosts spending and or cuts interest rates again.
As the monthly surveys of manufacturing have suggested, the slowdown in China is getting rougher and hasn’t yet hit bottom. The continued slowdown in Europe and the softness in America means it will continue in the current vein for several more months. As a result, export growth and local demand will remain soft and import growth (a measure of demand for raw materials) will remain weak as business uses up existing stockpiles. As a result global prices for iron ore and coal in particular will remain under pressure.
Spot iron ore prices fell to their lowest level in 2½ years on Friday — just over $US117 a tonne, while spot prices for coking coal are down more than 20% in the past two months. On top of that, thermal coal prices continue to weaken as the US gas boom sees more and more American coal companies dump unwanted coal on global markets, especially in Europe and Asia. That has pulled down the prices of our coal exports since the first quarter of the year.
China’s sluggishness was best down by the figures for industrial production. It rose at an annual rate of 9.2% in July, which was down from 9.5% in June and more than 10% earlier in the year. Exports rose by just 1% as shipments to Europe tumbled 16.2%. Imports were up 4.6%, down from the year-on-year rate in June of more than 71%. Output of electricity rose 2.1% after remaining static in June, oil imports and domestic production were weak and iron ore imports fell.
For the health of Australian balance of payments, one of the key indicators is the level of Chinese iron ore imports each month: they dropped to 57.87 million tonnes in July from 58.31 million tonnes in June. That was the second lowest monthly figure since last November and 9% down on May’s high of 63.84 million tonnes. July’s figure was up 6.5% on the same month of last year, but the trend since May has been falling. With prices falling and tonnages weak, the trade surplus will continue to come under pressure over the rest of the year, while estimates of receipts for the mining tax will start looking a bit on the skinny side by the end of December.
After China released weak data last week, the global spot price for iron ore (62% ex-Australia delivered to northern China dipped) to $US115, (according to Platts).
According to trade reports from China, the price could dip as low as $US105 a tonne in coming months as Chinese steel prices fall and mills take capacity off-line for maintenance and to cut costs. World spot iron ore prices have tumbled 17% since mid-June.
Spot coking coal prices fell to $US174.50 a tonne, down from $US226 a tonne and closer to $US290 a tonne a year ago. In fact, spot coking coal prices have plunged 23% since the start of July. Spot thermal coal prices range from less than $US60 a tonne ex-Newcastle for low-grade spot cargoes, to about $US90-$92 a tonne for high-quality, index-based prices. Prices at the start of the year were about $US125 a tonne and contract prices for the April 1 shipping year were based on $US105 a tonne.
The Chinese statistics bureau gives us a good idea of the weakness in current iron ore prices. China’s imports in July cost and average $US134.80 a tonne, and over the first seven months of the year, the country imports 423.75 million tonnes (up 9.2% on the same period of 2011), at average cost of $US138.50. That’s $US24.90 or 15% down on the average price for the first seven months of 2011 when 354.20 million tonnes were imported. Global spot prices are 10% or more under those averages.
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