Chinese ore glut bad news for Canberra

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On Wednesday, some Australian media outlets had China’s boom saving us (and so did parts of the Federal Budget). Far from it.

There are now signs of growing Chinese Government unease at an oversupply situation developing in the politically and economically sensitive steel sector.

It comes as the flow of monthly economic data for April this week has been mostly poor to questionable: exports and imports down again for a sixth month, industrial production positive, but down from March’s rebound from the depressed levels of January and February.

China’s industrial production growth from a year earlier slowed to 7.3% in April from 8.3% in March, providing more uncertainty over whether a Chinese recovery is underway.

The growth in factory output last month was less than half the 15.7% year-on-year rate in April 2008 and analysts said most of the growth this year has come from $US586 billion in stimulus measures, not from rising demand domestically or offshore. Electricity demand fell, even though production rose.

Bank lending was cut in April by a nervous government worried about speculative spending in the stockmarket and wasteful spending on unwanted capacity; but spending on investment was strong, retail sales were a touch higher and property prices and investment expanded slightly.

Australian media reports suggested that China’s continuing record level of imports of commodities like copper, nickel, aluminium, iron ore, soybeans and other commodities, was some how linked to the anticipated rebound.

They are not, and if anything, the stockpiling by the state has disguised the true level of imports, which would be down even more than the 22% fall in the month (exports were off 23%).

China’s steel industry is a key indicator: its health tells us just how well the economy is going: and how well big companies like BHP Billiton and Rio Tinto in this country are travelling. Even though imports of iron ore are running above 57 million tonnes a month (record levels), oversupply is feared in May and June. April’s imports of iron ore were up a massive 33%.

That was amplified by news that Chinese steel production fell 4% in April — the demand is just not there.

The news isn’t good for BHP Billiton or Rio Tinto which have a lot riding on a Chinese rebound. Prices are down sharply for iron ore and coking coal. Now those record levels of imports (much of it coming from purchases on the spot market), are raising the prospect of a sudden cutback in orders in a month or two’s time or an almighty slump in the steel industry as oversupply overwhelms poor demand.

The latest news comes amid a media report in the China Securities Journal suggesting that the central government had told banks to cut lending to steel companies wanting to expand production.

The Government issued the order to cut or stop lending to steel producers “still expanding production capacity without considering actual market demand”, the paper reported.

The actual notice, which has not been made public, reportedly also called for banks to curb or cut off loans to mills with outdated technology.

In addition, it told iron-ore importers to “correctly control the volume and pace of iron-ore imports in line with the actual demand of domestic steel up 22% from the first four months of 2008, when steel output was much higher and demand stronger (though starting to weaken).”

State media reported on Thursday that the China Iron and Steel Association planned to investigate surging imports after that 33% jump in iron ore imports last month.

“Amid the weakness in the domestic steel market, the imports in April were more than double the normal demand,” the Shanghai Securities News reported, citing Shan Shanghua, Secretary General of the industry group.

At the end of March, the composite price index of China’s steel market was 97.59 points, 31.4% lower than a year earlier.

Overall, domestic steel prices have been falling continuously and are currently lower than 1994 levels.

The World Steel Association forecast in April that China’s apparent steel demand is likely to fall 5% this year because of the fall in exports. It would be the first fall since 1995, when a real estate bubble burst.

So we now have the unlikely situation of surging imports, falling production and lower prices. The sounds like a steel crash to me, not a steel boom.

No wonder the government is worried.

Meanwhile the impact of the slowdown in the economy can be seen in China’s Government finances. Yesterday the Ministry of Finance said that revenue fell 13.6% in April, from a year earlier, to 589.72 billion Yuan (US86.47 billion; that pushed January-April revenues down almost 10%. the Ministry said the slower economy had cut taxes, fees and other changes.

The Ministry said spending jumped 31.7% in April, reflecting the huge stimulus package unveiled last November.

China’s industrial production growth from a year earlier slowed to 7.3 per cent in April from 8.3 per cent growth in March, providing more uncertainty over whether a Chinese recovery is under way.

The growth in factory output last month was less than half the year-on-year rate in April 2008 and analysts said most of the growth was a result of the government’s wide-ranging economic stimulus measures.

Retail sales in April rose 14.8% from a year earlier to Rmb934.32bn, a similar rise to March’s 14.7% growth.

Analysts said these figures tend to overstate consumer demand and are being boosted by strong government procurement as Beijing tries to return the economy to a rapid growth trajectory.

Most analysts expect retail sales growth to moderate in the coming months, dragged down by moderating incomes and as the impact diminishes from government incentive programmes, such as subsidies and tax breaks for car and white goods purchases.

The overall economic picture was further confused by figures from the government released on Wednesday that showed electricity production, often regarded as a proxy for economic growth in China, fell 3.5% from a year earlier in April.

When asked, government officials have been unable to explain how industrial production can be growing while electricity production is falling.

Analysts say it is unlikely that Chinese industries are making large advances in energy conservation but rather that the current slowdown has had a more severe impact on energy-intensive heavy industry.

China’s crude steel output fell 4 per cent in April from a month earlier, the government said on Wednesday.

For the second day this week, a major series of Chinese economic statistics has disappointed.

On Tuesday it was exports and imports which were lower than forecast by the market, and in the case of exports, down on March.

Yesterday it was industrial production, up 7.3% last month from April 2008, but down on March’s figure of 8.3%.

January and February (combined) saw growth of 3.8% for holiday and other reasons.

A year ago in the 12 months top April, 2008, production jumped 15.7%, so the slow down since then has been and remains significant.

Economists had forecast an 8.6% rise, so again a major miss for analysts after they missed the downturn in exports.

Surging investment, record bank lending (which was hauled back last month though) and climbing auto sales (up 37% in April alone) signal that the government’s $US586 billion stimulus is having a positive impact on the Chinese economy, but we might have to wait a few more months to find out if it is reviving it and driving new growth.

The rise in output is enough to keep the Chinese economy ticking over, but not enough to push exports up.

Chinese GDP eased to an annual 6.1% in the March quarter: on the information flow so far for April, there will have to be a significant pick up in May and June for that figure to be bettered in this quarter.

Australia wants it to be better, as does the Chinese government.

Analysts say industrial production is lagging the rise in the broader economy, but they don’t explain how something as central as production in an economy like China’s isn’t being impacted by the stimulus spending.

Analysts say Chinese companies are very reluctant to increase production when external demand is so uncertain, but the stimulus is designed to give the domestic economy a boost, not the export sector, although some policies on taxes, tariffs and other charges have been altered to make it easier and more profitable to ship overseas.

Chinese spending on fixed investment is rising; there are signs of life in property and in some sectors of the industrial economy.

Retail sales rose 14.8% in April, compared with the 14.7% rise in March.

New lending has already topped the 5 trillion Yuan government target for the year, and copper and aluminium imports rose to records in April, (helping western producers achieve better than anticipated prices, given the slack demand from other economies).

China has also been buying more cotton and soybeans plus some corn to stockpile.

The Chinese central bank has cautioned that the foundations for a recovery are not yet solid.