Today I’m going to upgrade my short term outlook for iron ore, LNG prices and the Aussie dollar. I don’t cover coal in detail but it is also clear that both versions of it will remain strong in the near term. All are based on the way in which macro and market structure factors combine over the next six months.
On the first, the Chinese economy is performing exactly as expected with a second half slowdown locked in as the credit pulse subsides. My Chinese steel forecasts of flat output to a small fall are on track. The main macro reason for the upgrade in commodity prices is the decent odds that we’re are going to see another kick of the can early next year. If Chinese authorities are going to reach their 6.5% growth goal in 2017 then they will have no choice, especially so as the real estate boom cools.
Beyond the next six months, I remain comfortable with the assessment that the Xi regime understands the asymmetric choice it faces in its economic transition. That is, it cannot go on with the debt-fueled investment-led growth model without risking a crisis that would threaten Communist Party control. Allowing growth to keep slowing as the alternative may have its challenges but an existential threat to the CCP is not one of them. Thus, as Xi gains further control of Politburo mid-next year the odds of further stimulus fade.
