China suspends 6000 miles of railway

Take a look at this video from NTD Television covering the difficulties confronting China’s Ministry of Railways. I’m no expert on the issues but Blind Freddy can see the threat here to iron ore. Correct me if I’m wrong, but I’m pretty sure that the anchor has an Aussie accent:

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Comments

  1. The threat to Aussie Iron Ore?

    2.86% of Australia’s GDP is Iron exports to China.

    1.32% Iron to ‘others’.

    Even if Iron to China halved it only signifies a 1.2% GDP contraction. Hardly soup kitchen time.

    • Iron ore and coking coal, which are basically the same trade, are 40% of Australia;s terms of trade.

      Any significant fall has very large flow on effects.

      The IMF recently forecast that a 13% fall in the terms of trade would have the following fallout:

      “Australia suffers a terms of trade shock. The size of the impact, however, depends significantly on the degree of policy flexibility elsewhere.

      With limited policy flexibility elsewhere, Australia’s terms of trade falls by about 10 percent in the first year, relative to baseline. The impact of the fall in global commodity prices on the terms of trade is partly offset by a fall in the price of commodity imports, including oil. With full policy flexibility in advanced countries, the fall in Australia’s terms of trade would be cut by two-thirds.

      Real GDP falls by about ¾ percent relative to baseline, because of lower demand from China and the negative impact of the Chinese shock on global demand. However, with policy flexibility in advanced countries the fall would be less than ¼ percent. The reduction in commodity prices amplifies the negative impact on nominal incomes, with nominal GDP falling by 2½ percent in the case of limited policy flexibility (1½ percent with full policy flexibility).

      Government revenue in Australia falls directly, through a decline in resource taxes and company income taxes, and indirectly through lower economic activity. We assume public expenditure is reduced gradually to balance the budget. As a result, transitory deficits add to public net debt which rises by about 3 percentage points of GDP over two years.

      A depreciation of the Australian dollar helps buffer the shock, as do cuts in the policy interest rate. The exchange rate depreciation redirects exports to non-commodities and reduces imports. The contribution of net exports to GDP growth in real terms improves. However, the depreciation is not strong enough to fully offset the impact of lower commodity prices on the nominal trade balance, which worsens by about 1½ percent of GDP. Because about half of private earnings from commodities accrue to foreign shareholders, the drop in the current account balance is smaller than the decline in the trade balance.”

      • “Iron ore and coking coal, which are basically the same trade, are 40% of Australia;s terms of trade.”

        We are not talking about the collapse of Iron and Coal, your post was about CHINA and IRON.

        Fe to the PRC (your post was about China laying rail lines OR not).

        A halving of Australia’s Iron exports to China is not the collapse of the Iron export industry nor our terms of trade in fact its just a measly 6.8% reduction in Total Australian Exports.

        A halving of iron exports to China leaves OVER 93% of exports intact.

        Further, Coal exports to China are tiny. Coal to China represents around 10% of the Coal export numbers.

        Coal exports to China represent 0.31% of GDP. Minuscule.

        Iron exports to China is talked up as THE ECONOMY by the media etc so maybe there will be a psychological impact. But the reality?

        As for IMF reports? Has there been one report or prediction from the IMF in the last 5 years that has any credence.

        • After rapid growth in the past decade, the main export market for Australia’s iron ore is now China (almost 70 per cent of iron ore exports in 2010), with Japan and Korea importing most of the balance.

          Where did you get 6.8% from Velociraptor?

          For Coal:
          As the world’s largest coal exporter, Australia supplies markets in more than 20 countries around the world. Major markets in 2009-10 were Japan (39%), China (14%), South Korea (14%), India (11%), Taiwan (9%) and Europe (6%)

  2. Will have to wait and see on this one – can be resumed fairly promptly and I understand applies to some, not all, of rail production.

    Indeed, measures to shore up funding may be underway:

    “To entice wary investors, the government recently cut the tax on interest from railway bonds and also designated them as government-backed bonds, rather than corporate bonds.”

    As I said wait and see.

    http://moneywatch.bnet.com/investing/news/china-railway-road-projects-run-short-of-cash/6317258/

    • Ronin8317MEMBER

      There is a political dimension to it. The former Railway Minister Liu Zhijun was prosecuted for ‘corruption’ earlier this year. Under Liu Zhijun’s management, China Rail incurred a massive amount of debt while he personally acquired an entire fleet of cars.

      After the high speed rail crash, there are significant concerns that China’s rail network is expanding too fast. The current appointed railway minister Sheng Guangzu have a history of being sent to various post as a ‘reformer’ and ‘problem solver’. Being already 62 years old, and with the compulsory retirement age of 65, he’s the type of person you would appoint if you want to make a lot of unpopular decisions quickly.

        • Ronin8317MEMBER

          The Chinese Central Government wants to reduce the amount of railway construction, many of which makes no sense what-so-ever, either economically or politically.

          Immediately after the July bullet train disaster, the Chinese press are awash with stories on how the railway expansion is ‘too fast’, safety is compromised, and the rail project runs against the advise of engineers. There is a power struggle going on. When the Central government guarantees the debt of the China Rail, that also means no new debt can be issued without approval by the Chinese Central government. You have to chart the relationship between each actor and their respective politburo backers before you can form a complete picture. However, everything so far points to a slowdown in railway construction.

        • H and H has a good point here.
          “Iron ore and coking coal, which are basically the same trade, are 40% of Australia;s terms of trade.”

          If investors get spooked about this falling it could change things. The only keeping Australia out of the poo is mining everything else is pretty much on a fall.

  3. The threat to Aussie Iron Ore?

    2.86% of Australia’s GDP is Iron exports to China.
    1.32% Iron to ‘others’.

    4.18% (2010 prices?)

    Suppose coking coal is another 2% or so…maybe 6.25% all told.

    Assume both price and volume reductions…30% in total (P x V) terms…knocks about 2.0% off GDP over 12 months, knock another 1-1.5% off as investment falls, and allow that these falls extend beyond 12 months….and then look at the adjustment/multiplier consequences described by HnH…It’s very easy to see a significant contraction in iron and coal exports clipping 2-2.5% pa from GDP, extending over a couple of years or longer.

    Is it happening? Who knows!! The ore market says it could be.

    • The issue with Australian mining hopes is the same regardless of whether the world recovers or not. With prices high, new supply will eventually come online and result in lower prices.

      Apparently (correct me if I’m wrong) Brazil is lowering iron ore prices and this is leading to the sustained fall in prices. This is despite most other things rallying. The idea that Australia could have 20 years of mining export boom is ridiculous under any growth forecasts.

  4. Hugh PavletichMEMBER

    Now if this is going on with rail in China – what about the rest of the construction sector?

    It is difficult to see how much of the infrastructure build is paying its way.