Thursday, 7 March 2013

Chart of the Day - Chinese Iron Ore back to 2010 levels

"But it is possible that, in the days ahead, these years we have lived through may eventually be thought of simply as a period of disturbance and regression." - Hjalmar Branting, Swedish statesman 

Back in May 2012, we argued that Australia at some point could be facing the "Iron Ore" conundrum given its exposure to Iron Ore. Although we had it wrong in relation to our negative stance on the Australian dollar, the Australian dollar has been so far remarquably steady compared to the US dollar - source Bloomberg:

When ones look at the significant drop in Iron Ore inventory at port since 2009 coming back to 2010 levels, one can wonder what can be expected in 2013 for Chinese growth given the recent weakness seen in China's PMI - source Deutsche Bank, Shipping Weekly, 4th of March 2013:

While Chinese iron ore imports were up 21% y/y, they were down 4% m/m after a strong December according to Deutsche Bank:

Yet this recent rally can be challenged according to a recent Bloomberg article from the 7th of March - Iron Ore Surge Prompted by Demand, Speculation, China Says:
"A recent surge in iron ore prices was caused by changes in demand, market speculation and “unreasonable” pricing methods, China’s top planning body said. The biggest mining company said it hadn’t curbed supplies.
Chinese steelmakers re-stocked iron ore during the traditional “winter reserve” period and ramped up purchases as confidence in the economy improved, leading to an explosive increase in demand in the short term, the National Development and Reform Commission said in a statement on its website.

Chinese steelmakers re-stocked iron ore during the traditional “winter reserve” period and ramped up purchases as confidence in the economy improved, leading to an explosive increase in demand in the short term, the National Development and Reform Commission said in a statement on its website.
The three largest mining companies and certain traders either delayed or controlled deliveries to make up for their previous losses, creating a false impression of temporary short supply, according to the NDRC. Some mining companies also bought iron ore from the market to drive up prices, it said. - source Bloomberg

Iron ore exports to China from Australia are indeed a strong indicator of Chinese industrial activity, and given it fell by 14.8% in February from 18.38 million tonnes in January to 15.66 million tonnes in February, one can wonder if the Chinese holiday season or the cyclone disruptions are entirely responsible for the slowdown or if there is more to it given Korea data could indeed herald surprise China exports drop according to Bloomberg:
"South Korea’s biggest export drop in seven months suggests China will surprise the market and also report fewer shipments in February, lessening the case for monetary tightening in the world’s second-biggest economy, according to Nomura Holdings Inc
South Korea is the only one of Asia’s 10 biggest economies to report February trade data thus far. Given that China is its biggest export market, Korea’s sales drop signals that its larger neighbor is poised to report weaker-than-expected shipments, said Zhang Zhiwei, Nomura’s chief China economist. The CHART OF THE DAY tracks monthly changes in the two nations’ overseas sales since 2008. South Korea said exports in February declined 8.6 percent from a year earlier, the second drop in three months. Based on that result, Zhang predicts China will announce tomorrow a 10 percent decrease when February figures are released in Beijing. Nomura’s economist is among only six of 33 analysts surveyed by Bloomberg that predict a drop. The median estimate is for an 8.1 percent increase. “The data suggests China’s recovery is not so strong,” Hong Kong-based Zhang said. “We still call for the People’s Bank of China to tighten policies, hike interest rates and regulate shadow banking activities this year. But recent weak macro data will only make the central bank delay it.” 
China this week affirmed its 2013 growth target at 7.5 percent after the economy grew 7.8 percent in 2012, the slowest pace in 13 years. China will report a February trade deficit of $28.5 billion, according to Zhang. That would be the first shortfall in a year and compares with an average monthly surplus of $16 billion in the past three years. Growth rates for exports and imports in the first two months are distorted by changes in the timing of the weeklong Chinese New Year holiday, which fell in February this year and January in 2012. Nomura’s forecasts tie in with the new export orders component of China’s official Purchasing Managers’ Index, reported on March 1, which fell to a six-month low of 47.3 in February. The broader PMI sank to a five-month low of 50.1, according to data from the National Bureau of Statistics and China Federation of Logistics and Purchasing. A reading of 50 marks the divide between expansion and contraction." - source Bloomberg.

Could the recent slowdown and price manipulations for Iron Ore spell trouble as well for neighbor Australia given its dependency to Iron Ore exports? We wonder.

One thing for sure, the recent weakness in Korea's exports courtesy of Japan's agressive monetary stance has put the Japan-Korean risk gap near parity has indicated by Bloomberg:
"The push by Japan, the world’s most-indebted government, to weaken its currency to boost exports and end deflation may reduce its perceived default risk below South Korea’s, where won gains are having the reverse effect. The CHART OF THE DAY tracks the cost of insuring the five- year sovereign bonds of Japan and South Korea since August. Thespread between the two credit-default swaps fell to 1.2 basis points on Feb. 5, the narrowest since Oct. 11, the last time it was more expensive to insure against a Korean default, data compiled by CMA show." - source Bloomberg

Korea losing its competitive edge towards Japan thanks to a weakening Japanese yen could indicate weaker than expected Chinese growth as well as impacting Australia in the process.

"Worry is interest paid on trouble before it comes due." - William Ralph Inge, English clergyman

Stay tuned!

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