China, Interest Rates and more European Debt

In a follow up to a little post yesterday about China’s iron ore demand we note today that customs data from China matches what we said.

China, the world’s biggest iron ore consumer, imported 19.4 million tonnes of iron ore from Australia in August, down 16 per cent from July, customs data showed on Tuesday.

Total imports over the month fell by 13 per cent from the previous month to 44.61 million tonnes after Chinese steel mills pulled back on purchases an uncertain outlook.

Data also showed that China paid 1 per cent less to buy iron ore, at $US139.66 per tonne.

Shipments from Brazil dipped slightly by 2 per cent to 10 million tonnes in August, and Indian-origin iron ore imports also declined sharply, by 22 per cent from the previous month to 5.08 million tonnes.

It is well known that China has long resisted pricing from the big international iron ore companies and has been investing heavily in West Africa, Russia, and Southeast Asia in an attempt to remove the strangle hold that BHP, RIO and Vale have on them. It is obvious that they would also be investing domestically. In the Chinese economic context local resources are close to free. The iron ore may be a lower grade but we doubt that will make too much difference when compared to the high cost they are paying in both money and face.

If China is able to get access to non-BHP/RIO/Vale iron ore in any large quantity then they would have a huge bargaining chip and prices would fall dramatically. As we have said previously removing dependencies on externally sourced economic input is a step forward for any economy.

We note however, in a wonderfully timed press release , ABARE has upgraded the forecasts for Australian exports with China being the centre piece.

Australia’s commodities forecaster has raised its estimates for iron ore and coal exports, predicting that a boost in Chinese steel-making capacity next year would suck in more imports of the two main steel-making raw materials.

The forecaster was reflecting market views of an improving outlook for the global economy in 2011, underpinned by China’s growth and some increase in raw material demand in the United States as infrastructure spending programs start to kick in, one analyst said.

ABARE is forecasting that growth of the global economy is going to continue, specifically with China taking the lead, and that should result in increased commodities demand while anything coming out of the US will add to the demand picture, said DJ Carmichael & Co mining analyst James Wilson.

We have no doubt that China will continue to grow, although as we have said before they still have a property and infrastructure bubble to deal with. The issue for Australia isn’t whether China will grow; it is where it will continue to get its commodities from. As we said yesterday, only time will tell if this is simply a cyclic decline or the start of something bigger.

We also note today that interest rate talk in Oz is starting to reach fever pitch.

Within 24 hours of being appointed by HSBC as chief economist for Australia and New Zealand, former senior Reserve Bank economist Paul Bloxham has dropped a bombshell, predicting the RBA will raise official interest rates by 125 basis points by the end of next year.

Bloxham was with the central bank for 12 years and was working within its economic analysis department before joining HSBC. He would be intimately familiar with the bank’s thinking on monetary policy.

His forecast isn’t out of line with the thinly veiled warning from RBA Governor, Glenn Stevens, yesterday that faced with the largest minerals and energy boom since the late 19th century, monetary policy would play a role in managing a “fairly robust upswing.”

Given the above news from China we think that 125 points maybe a little over the top, however 15 months is a long time in economics so you never know. In the short term however there is little doubt at all that Captain Glenn and Co. are only thinking about up. Which again makes us ask the question, is Oz real estate ready for the economy ?

And finally tonight we note that the European experiment continues with another round of debt issuance from countries that are already drowning in debt.

Ireland sold 1.5 billion euros ($1.95 billion) of bonds bonds repayable in 2014 and 2018, with investors bidding for more than five times the amount of bonds available.

Spain sold 12-month bills at an average yield of 1.908 percent, compared with 1.836 percent at an auction on Aug. 17, and 18-month bills at an average yield of 2.146 percent, compared with 2.078 percent at the prior sale. The yield on its 10-year bond dropped 5 basis points to 4.19 percent.

Lets hope the ECB still has plenty of money when those bonds mature because in our opinion it is quite possible that both Ireland and Spain will be trading in a different currency by then.

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