China spoils the party

Let’s party! Yes, it’s a world party and we’re all invited. At least, everyone else is. I’m sober, and, like some stale chaperone, worried.

Still, let’s face plant into the punch before we call the police. Preliminary US Q3 GDP came in at 2.5%, right on expectations. Here’s the chart from Calculated Risk:

This is an advance estimate and these tend to be revised down. Nonetheless, it’s a damn sight better than it looked like delivering six weeks ago. So bravo.

Still inhaling on the sweet Latin nectar, and the Eurozone fix, such as it is, has reconfigured the macro settings on the bullish side for now. The $US was smashed last night, returning us to the post Bretton Woods II growth dynamic that has kept the world economy going since 2009. That is, a weak dollar boosting external demand for the US, and creating capital flows into emerging markets which boost their domestic demand as well as their exports to the US, and inflate commodities. In short, the virtuous cycle of undollar love.

But, sadly, gargling around the punch, I mentioned emerging markets. And it is here that the party comes to an abrupt halt. Something has gone badly wrong with China’s other growth engine, fixed asset investment. And, as we shunt backwards from the bowl, and wildly shake the punch from our hair, spraying the room with scarlet droplets, we can hear the approaching wail of a police siren coming to ruin the evening.

The culprit is iron ore, down another 5.7% yesterday to $120.20. 12 months swaps hit a new low of  115.89 down 1.37%. Meanwhile, Shanghai rebar was down a smidgen, 0.23%. Seems to me, we’re in danger of a contango in iron ore, which would be a first.

The culprit is not hard to find. From the FT:

Chinese metals companies, lynchpins in the global economy, are warning that Beijing’s monetary tightening has gone too far, causing domestic customers to delay orders and raising the risk of payment default.

In one of the clearest signs yet of deteriorating sentiment, Baosteel, China’s second-largest steel producer, has told the Financial Times that its customers were pushing back scheduled deliveries “due to declining economic growth and tightening credit”.

…China has tightened monetary policy this year in an effort to fight inflation, and those measures have started to cut into demand as construction growth slows. Nonetheless, the country is still buying vast amounts of raw materials, with copper imports hitting a 16-month high last month and annual buying of corn heading to its highest level in 15 years.

China’s large industrial groups are increasingly voicing concerns over the impact that credit tightening is having on their customers, after a year in which Beijing has raised interest rates and bank reserve requirements. Chalco, China’s biggest aluminium maker, said it was worried about payment defaults from credit-squeezed customers. “Because our downstream customers face the predicament of scarce capital, the company’s risks of payment collection are increasing,” it said this week. “We must pay great attention to this.”

China’s steel demand growth is expected to slow this year, and analysts say that mills’ miscalculations led to a glut of steel inventories building up in September, leading to a drop in steel prices during the past month.

Yes, it’s the hangover from the last undollar binge that we can blame, that has resulted in what looks more and more like a hard landing in China’s fixed asset economy. But there’s more. As the party goers awake bleary eyed, the wreckage of last night’s binge comes into focus. From Reuters:

While the central bank’s battle against inflation has choked off funding for new buildings, roads and railways, talk of Beijing adopting an easing monetary cycle or lifting property curbs is premature, analysts say, although authorities could seize the chance to force consolidation of the sector.

“Steel demand is very poor,” said Judy Zhu, an analyst with Stanchart Bank in Shanghai.

“There is hardly any restocking going on because buyers are cash strapped and there are growing worries of a further slowdown in the property sector.

“I don’t expect Beijing to start easing until early next year, which means it would be difficult for steel demand to improve markedly.”

UBS analysts said steel output growth in China could slacken to just 4.4 percent for a total 726 million tonnes in 2012, marking the weakest level since 2008 and down sharply from industry estimates of 11 percent this year.

Such a development, compared with some analysts’ previous expectations for growth of 7 percent to 8 percent, would cut previous output forecasts by about 20 million tonnes, which would in turn cut iron ore consumption by at least 35 million tonnes and coking coal by 13 million tonnes.

It certainly is too early to consider easing, that is if China is serious about containing its property prices, which have just begun to fall. However, steel based activity is falling very fast now, also according to Reuters:

China’s average daily crude steel output dipped to 1.7998 million tonnes over the Oct 11-20 period, the first time it has fallen below 1.9 million tonnes since February, data from the China Iron & Steel Association (CISA) showed on Thursday.

A growing number of Chinese steelmakers have begun overhauls at their facilities as they try to shield themselves from a steep decline in steel prices and a slowdown in sales, with Beijing’s tightening moves continuing to weigh on demand.

“Many steel mills have expensive raw materials, which they bought earlier at high prices, and steel prices have fallen rapidly entering October, so we are seeing more overhauls by steel mills as their margins worsen,” said Hu Yanping, an analyst with industry consultancy

The utilization rates at 111 rebar and wire rod rolling mills in northern China’s Tianjin city and Hebei province stood at 75.2 percent this week, down 10 percentage points from a week earlier, a survey showed. CISA originally said that daily output in the first 10 days of October reached 1.934 million tonnes, suggesting the country’s mills were still producing at very high rates despite the woes facing the sector.

But according to the association’s latest data, accumulated output over the first 20 days of October stood at 36.357 million tonnes, indicating that it has revised its output numbers for the first 10 days of the month to 1.836 million tonnes, according to Reuters calculations.

And here is the CISA weekly output data showing the sudden declines:

Meanwhile, as nauseated party goers stumble out of the building, the iron ore majors are still boozing. Again from Reuters:

Brazilian mining giant Vale joined its rivals in pledging on Thursday no let up in iron ore production, even as prices slump, European buyers cancel cargoes and Chinese steelmakers clamor for price relief.

Signaling a firm belief that the nearly 30 percent slump in spot market prices this month is a temporary blip, executives of the world’s biggest iron ore producer said Chinese monetary policy easing should help bolster demand from its top consumer.

Vale also confirmed further changes in the way iron ore is traded, saying the company that first broke the age-old annual contracts system is now in talks with customers to move from quarterly toward spot pricing. “We do not plan to make any cuts to production,” said Chief Executive Murilo Ferreira in a conference call with reporters. “Vale is one of the companies with the lowest production costs. If anyone is going to shut production, it will have to be those with high production costs.”

The comments, a day after Vale’s earnings missed analysts estimates due to a drop in Brazil’s currency, show the company defiant in the face of skepticism about China’s iron ore demand and worries about global economic growth.Company officials said earlier on an earnings conference call that Vale is sticking to its planned production targets of 310 million tonnes for 2011 and 320 million tonnes for 2012. Australian rivals BHP Billiton and Rio Tinto have also said they plan to keep ramping up output.

And the famous party animals of Brazil are getting a run for their money from the hard-drinking sandgropers. From BusienssWeek:

Fortescue Metals Group Ltd., Australia’s third-biggest producer of iron ore, said prices for the steelmaking ingredient won’t drop much more from their lowest level in 15 months.

“I don’t think they’ve got much lower to fall,” Chairman Andrew Forrest said in an interview with Bloomberg Television yesterday. “China has deliberately slowed its own growth to allow its economy to catch up to keep inflation down. You’ll still see growth rates going from 9.7 percent to 9.1 percent. That’s still massive growth.”

…“It’s all about China restricting credit,” Forrest said on the nation’s economic slowdown. “The steel mills have acted in collusion in China. That’s probably spooked a couple of Australian producers or international producers into having to compete with each other.”

BHP Billiton Ltd., the world’s biggest mining company, last week said the slump in prices was due to flagging demand from European steel mills while orders from its largest customer China have so far been unaffected.

“In China overall, which will over the long run be the driver of prices, we have not seen anything really happening there yet,” Marius Kloppers, BHP’s chief executive officer, said Oct. 20.

ArcelorMittal, the biggest steelmaker, has idled plants in Luxembourg, France, Germany and Spain in the past two months.

The European fix does nothing for its economy beyond a short term confidence boost. There’s likely to be no turnaround in steel demand there in the near future. I do expect China to ease by year end. But if they are serious about containing real estate prices, which they seem to be, easing will have to be paced with declines, not a bounce back.

For now, at least, the problems confronting the infrastructure real estate sectors are mounting not falling. Despite the bravado, the iron gut party-goers will likely be forced onto the wagon before they can binge again.

Houses and Holes
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  1. HnH, the US GDP number is in large part due to three things – a rise in private non-dwelling investment, especially in computers and software; a rise in household consumption; and the calculation of the GDP deflator.

    The rise in household consumption is mostly due to a fall in savings. Household income actually fell in the quarter. The GDP deflator does not capture the whole impact of price rises, so tends to overstate real GDP. Meanwhile, investment in new technologies is not helping jobs, which remain stagnant.

    This is a sort of GDP number is not sustainable. It is not possible for incomes to fall and GDP to expand for long. The fall in prices in the housing market, the unwillingness of businesses to hold inventories (they’ve been falling) and the abysmal level of jibs growth also suggest an economy with weak final demand.

    This GDP number is an aberration in my opinion.

  2. what looks more and more like a hard landing in China’s fixed asset economy

    Is this your official China hard landing call?

      • Shall we just consider this your “pre-call call”?

        Just remember – too much equivocation and you’ll have to resort to a job in the MSM or academia.

        • Consider it what you will. I’m not an expert on the Chinese economy so I can’t make that call. As I’ve said before, on China I rely on second hand information and macro principles. At least in these terms, a fixed asset bubble appears to be bursting – cheap credit reversed, prices rolling over, a pipeline of oversupply in finished product as well as sudden gluts in the inputs, scandals erupting in shadow finance and former growth wunderkind, bank and developer equity in the dunny etc…

          But it’s a whacky ol’ place.

          • But it’s a whacky ol’ place.
            That speaks volumes.
            Too big to be centrally controlled in all its detail.
            But nevertheless totalitarian, so that conventional free market thinking will not work.
            The Chinese are just different.

          • “Timing” is the hardest thing to predict. But I think it is an indictment of our “experts” today, that so many of them not only cannot see “Asian Crisis II” looming like the crest of a tidal wave, but are making plans for their own economies based on Chinese “stability”.

      • “No, I’m not making it official. I’m saying what I said, right now it’s looking more and more like a hard landing in the fixed asset economy…”

        And that will effecting a whole lot of other areas in China as well to create other hard landings.

  3. so now that europes not going to plunge the world into a another depression and never was, its time for the bears to move onto china? Personally, i wouldnt bet against china. I have done so in the past and got absolutely dusted.

    Forrest is right. this is a controlled slowdown engineered by the chinese authoruties. remeber all those rate rises they did not long ago? well, yes rising interest rates will slow growth so hardly see how this slowdown is a “suprise” its called cause and effect.

    now back to that puchbowl, this party rocks! i need another drink

    • Are you seriously believing that this one successful meeting turns around all the data pointing towards a recession in Europe and a high risk of US heading for/ already being in a recession as well?

      I guess I really am a glass half empty person these days, as opposed to the happy folk partying today.
      Let’s see how many investors will show long term interest in joining this party taking place in a burning house.

      • H&H with all due respect and i do mean that seriously but half the comments here at MB suck. all this talk of recessions / depressions they are nonsense.

        im not saying i saw china slowdown becuase i didnt but if you are looking for an explanation i would have thought the agressive rate tightening earlier this year would be a pretty good place to start.

        MB prides itself on holding the MSM to account for thier flimsy claims and baseless forcasts yet here in the comments section you can say and get away with whatever you like. i try to hold some of these commentators to account for their baseless cliams and im the bad guy.

          • will do, my apolgies.

            for whats its worth i agree the market is abit carried away. you can see it today as the market pulls back. good time to look in profits here i reckon

        • all this talk of recessions / depressions they are nonsense.

          Is there a recession in Greece?

          Is there a recession in Ireland, Portugal and Spain?

          Is there potential for a recession across Europe?

          Probably the most reputable economic forecasting institute in the world forecast a US recession just 4 weeks ago.

          China? Well who knows! Do you trust the data? Do you have faith in the authorities to manage a soft landing? Can China rebalance without a hiccup?

          Where China goes, Australia follows.

          I don’t think all these recessions (and potential recessions) can be dismissed as nonsense.

          • fair point and i should have been more descript. the recession /dpression brigade are talking about here (oz) and the US and there is no evidence yet.

        • all this talk of recessions / depressions they are nonsense.

          If you’re here to set us all straight on that, you probably need to be pointed to ZeroHedge. Now there’s a site you’d be busy all day correcting people!

          • thanks for the link R2M, been a member there for 2 years. they are perma bears at ZH and by no means have a great record in calling the market. but yes its a great site that i frequent regularly.

    • >so now that europes not going to plunge the world into a another depression and never was, its time for the bears to move onto china?

      GB can I suggest you acquaint yourself with trading economics ( before making such claims.

      There is nothing in this new European plan that will fix the fact that many of the nations are completely insolvent. Europe has continually shovelled money at Greece but for what???

      Europe may get a bit of short-term boost if Sarkozy can convince China to hand over some mulla but that is it.

      Are you genuinely of the belief that there is nothing wrong with the European economy?

      • “Are you genuinely of the belief that there is nothing wrong with the European economy?”

        of couse not. but i dont share the miantream veiw here in the comments section that its going to send the world into another depression. economies have problems all the time.

        just becuase its going to take along time to fix doesnt mean it not going to be fixed.

        • GB
          Did you happen to see the front page of the Australian on the 19th of October?
          There is a big headline ” IMF’s depression fear”. Perhaps you could take a look.

          Btw my disclosure: Not a trader, not working in the finance sector, and opinions expressed are my own thoughts based on what I read. I read a lot.

  4. “high risk of US heading for/ already being in a recession”

    US GDP just printed at +2.5% annual growth. up from +1.3% the prior q. ie growth is not only positive but is accelerating.

    can you please explain how this fits with your “already being in a recession”

    • Sure GB.
      The real GDP growth in the US in the first half of this year was way below expectations, unemployment figures are dismal, housing is not recovering, production of consumer goods has been rising whereas real retail sales have been contracting, Empire index, Philly Fed in the past few months have been abysmal even if Philly Fed did spike etc. How much more do you want? The US economy is in a worse shape than it was before the onset of the crisis.

      Yes, the US may start to recover but it is by no means guaranteed.

      Daily traders can ride the waves up and down but before going long on stocks as you’d like to encourage people to do, the fundamentals need to get MUCH more convincing.

      • “Daily traders can ride the waves up and down” im not a daily trader im an investor.

        “before going long on stocks as you’d like to encourage people to do, the fundamentals need to get MUCH more convincing.”

        yes i have been encouraging that. we just saw the best buying opportunity for 3 yers. its been great.

        What your missing is its these risks and uncertainty that make it possible to buy stocks as cheaply as they are. Id also like to see the fundamentals improve but understand that if you remove the risks you have to pay more for stocks, thats how it works. Some people are happy to let these opportunites pass them buy and wait for more certainty before committing and and end up paying more and thats fine. seems like you fall into that category and there is nothing wrong with that. Persoannly i like to buy in these conditions as on valuations i actually think the risks are very low.

        but if we are going to knock each others veiw, which i do enjoy and is afterall what makes a market, lets at least keep it factual. claiming the US is in recession the morning after a +2.5% GDP print is probably a bit much.

  5. GB and some other China bulls appear to believe the Chinese CP will “engineer” a controlled slowdown.

    Just like they “engineered” a banking crisis, a stockmarket crash, a massive property bubble, a shadow banking industry of immense proportions, $1.7T of off-balance-sheet local govt debt.

    Some “engineering” that.

    I suggest you read the Great Leap Forward to understand the historical context of what is happening here, and how centrally “engineered” economies work.

      • I’m a ‘China Hopeful- You Never Know’, neither bull nor bear but cognizant of the benefit on many levels of the Chinese people gradually moving from widespread poverty and hardship to modest financial wellbeing.

        Certainly not in the camp of China Failure cheerleaders – so many here at MB. Perverse.

        • Hope has nothing to do with it.

          The long term China “catch up” narrative has history on its side. The only risk I see to it is political. That’s why I’m a long term China bull.

          Your own comment betrays you. You declare you’re a China ‘hopeful’ yet lambast everyone here for closely analysing the risks – that is, not relying on something as vapid as “hope”.

          It is you that is “cheeleading”.

          • Firstly, ‘hope’ is far from vapid: Hope sustains much of the most fervent held beliefs of mankind.

            Secondly, you cannot deny the China Fail cheerleading that takes place at MB (by a large number of commenters) – albeit cloaked in economic analysis of others. Scratch below the surface – there are often disparaging references to many aspects of Chinese culture that extend beyond the economy – and this indicates to be something other than ‘closely analysing the risks’. I will continue to lambast such views. I suggest the similar editorial practice at MB.

          • Damn, playing the race card?

            If you see anything of that nature in future let me know and it’ll be deleted immediately.

            Not everyone is super knowledgeable but they have the right to comment. I look forward to you pointing out the error of their ways, but can I suggest you do so with something more persuasive than hope?

            Otherwise you’re just as unconvincing.

          • HnH

            I retract references to ‘hope’ ‘hopeful’ as offence not intended. I’ll leave it at ‘You Never Know’. Well, we will over time of course… Good Bad or Indifferent.

            Surprised that the mere mention of “hope” should upset – particularly in light of much which is said here. Vapid? Unconvincing – well was not meant to convincing, it being a desire, a…hope. Ooops.


  6. GB, consider this.
    The big symptom of every big crash for the last few decades, that the whole econ profesion misses, is a bulging racket in “planning gain” in urban development.
    When rural land is converted to urban, with fair and moderate profits for developers, the effect on economies is one of stability and growth-enabling. When it becomes a racket, with tens or even hundreds of percent “planning gain” over the value of the rural land, a destructive property bubble in entire urban areas (not just the fringe) develops.
    Look at China today. Empty apartments with prices too high for the hardworking slum dwellers, but on which corrupt officials have pocketed fat capital gains. You could bring apartments to the market cheaper in outright DOLLARS, let alone as a factor of incomes, in Texas.
    This brings me to my next major point. MOST of the USA did NOT have an urban land price bubble. The crisis as we know it, related to probably 20 cities, maximum, in the USA. There is another 200 odd cities that were never affected. The crucial point is that you can bring property developments to market in THESE cities without anyone making a fat “planning gain”. THIS is where “the US economy” is getting its stability from today. If California was a separate country, it would be Ireland; and the rest of the USA would have hardly blinked between 2000 and now.
    Check out “Texanomics” Blog.
    Germany is Europe’s anchor because it, too, has low, stable urban land prices and minimal “planning gain”, although the reasons for this might be different.
    China’s racket in “planning gain” (and India is the same) is due to outright corruption – but in Western countries the same process has a fig leaf of respectability by calling it “urban growth containment”.
    This is “elephant in the room” stuff.

  7. I don’t know who 3d1k is referring to but as I have posted in this thread, I’d like to say for the record that I am not cheerleading for a slowdown in any economy. I also hope US is growing, Europe dealing with the sovereign & banking crises, China saving the world and Australia having no trouble at all.
    However, if all our hopes came true no one would ever lose money or get sick. IMO it is a sign of being a realist by nature to try and prepare for potential adverse events before they occur.

    If some commenters here in MB feel so superior in their knowledge that others should become shy of daring to say anything, the discussion will soon die. Is that what you wish for? Even if some of us haven’t managed to get hold of the latest data of each day or week, it doesn’t mean we haven’t got a clue.

    On the topic, a couple of articles I find interesting, whether “right” or “wrong”.

    Roubini on China slowdown

    Reuters China files

    • Goldilocks (not afraid of bears!)

      Generally many commenters are reasonable, you may be one of them but I assure you there are many comments here where I would question the motivation. Seriously.

      I would not put myself in ‘superior in knowledge’ category, would you put yourself there? I may always have a touch of the skeptic but not the doomer. I think real challenges lay ahead for the global community but remain (dare I say it, hopeful in the long run (apologies HnH)).

      Afterthought, how do you ‘prepare’…

  8. Reuters China files part 2

    Reuters China files part 3

    Even if it is an outrageous thought, I think it is reasonable to question the sustainability of China as a major growth engine in the 5-10 years, if its main export zones are in a recession, depression or stagnation period, desperately needing to create local jobs. Too early to predict such an unwelcome outcome, but maybe worthwhile to think about such a scenario, just in case?