Burying your head in the mineral sand…
Last week, The Australian Financial Review’s Angus Grigg and Jamie Feed wrote a neat summary of the growing cries of concerns around China’s economy.
We summarise as follows:
– Dong Tao, Chief Regional Economist at Credit Suisse says there is “no good news to report on China…the Chinese economy is struggling”
– Greg Lilleyman, RIO’s President of Pilbara Iron Ore Operations says “additional exports and a slowing in steel demand growth would hurt the price in tens second half of the year”
– Andy Xie says “This is not good news for Australia” and “the Australian housing market and dollar were vulnerable to slowing growth in CHina, which could fall as low as 5 per cent in coming years”
– Zhiwei Zhang, Nomura’s CHina economist says “China is displaying the same three symptoms that Japan, the United States and parts of Europe all showed before suffering financial crises”
– Zhiwei Zhang also said “There has been a rapid build up of leverage, elevated property prices and a decline in potential growth”
– Dong Tao also said “Shadow banking is a big time bomb and rising inflation will be the catalyst to turn this boom into bust” predicting defaults will begin in the second half of next year, noting the rapid expansion of credit had failed to stimulate the private economy.
It seems that finally the world is waking up to what we have been warning you about for over two years. Through our articles and columns about BHP’s intrinsic value (Australia’s most inherited stock) and our explanation of basic iron ore economics we have explained that the iron ore price cannot continue higher, must fall and that we sold all our mining services company exposure back in April 2012.
Finally Goldman Sachs has released a report that notes growth in demand for iron ore will be below GDP growth as China’s economy matures and that the global seaborne iron ore demand will eventually revert to its historic growth rate of about 2 per cent a year.
Predictably, they too have indicated that the reason for this is the composition of China’s growth away from infrastructure capex. We have previously described the unsustainable rates of growth were being propped up by equally unsustainable proportions (>60%) of capital expenditure.
Goldman’s also note that larger than expected domestic production will mean fewer tonnes of seaborne iron ore will be bought.
Goldman’s concluded last week (A bit late for those who bought BHP shares at $44) that the iron ore market will be in surplus next year and by 2015 about 200 million tonnes of seaborne supply will need to be ‘’rationed’’ out of the market.
Goldmans believes the price could fall through this year and continue to slide until it is below $US88 a tonne in 2018.
What we know is that nothing in commodities moves in a straight line and because of that we believe that you won’t have to wait for 2018 to see $88 iron ore prices.
You might like to read our March 2010 warning here.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
