Has Australia Blown the China Boom?

Uh-Oh… What’s this mean for Australia and its fabled budget surplus?

‘Falling export prices a risk to surplus’ says today’s front page headline in the Financial Review. The article draws on a recent report by Chris Richardson at Deloitte Access Economics. The crux of the argument is that the mining investment boom is about to peak. Given China’s slowdown, there are no new big projects on the horizon. So Richardson reckons the mining boom has two years left, max.

We wonder which glasses investors might look at China through this week? Recently, the rose coloured ones have been in use. The general vibe is that the Chinese economy has just about bottomed and will rebound in the second half.

But over the weekend, Song Guoqing, a member of the People’s Bank of China (PBoC) monetary policy committee, said that third quarter economic growth could slow to 7.4%.

There are a few ways to look at this. It could be a message to the market to not expect too much in the way of further monetary stimulus (given too much stimulus got China into trouble in the first place), or it could be a subtle message that the PBoC expects a weaker Chinese economy and will loosen monetary policy further.

In other words, we don’t really know what it means. But for a PBoC member to throw around a weak number like that does suggest China’s leadership remains concerned about how to manage the slowdown.

As well they should be. China Daily reports that iron ore stockpiles in China have reached record levels.

‘Iron ore inventories in China reached a record high of about 100 million metric tons due to shrinking downstream demand, but major global suppliers are still increasing output.’

Which brings us back to Australia’s exports and budget surplus. The Labor government’s promised surplus for 2012/13 depends massively on coal and iron ore prices…the same prices that are now falling under the weight of China’s slowing economy.

Interestingly, the China slowdown has barely even impacted iron ore volumes as yet. The China Daily article points out that iron ore imports for June were 58.3 million tonnes, down only slightly from 63.8 million tonnes in May. BHP and Rio will produce and export at a record rate this year, and have major expansions planned.

As we pointed out to Sound Money. Sound Investments subscribers in a report on Friday, iron ore accounted for 23.8% of total exports in May 2012, up from 4.7% in May 2004. We don’t know exactly where the ‘mean’ is in relation to iron ore exports as a % of total exports, but we guess that it’s in the process of reverting to the mean now.

If this is the case, the effect on Australia’s export earnings has barely begun. And the surplus that Labor is trying to pin its economic credentials on is already gone. Which raises the question, has Australia blown the China boom?

More on that tomorrow.


Greg Canavan
for Markets and Money

From the Archives…

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Flexible Investing to Become a Relaxed Investor
17-07-2012 – Murray Dawes

China’s GDP Figures… Lies… Damned Lies?
16-07-2012 – Dan Denning

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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