Bulk trouble

According to the AFR this morning:

Falling industrial output in Australia’s key mineral export markets of China and Japan is putting pressure on energy coal prices.

China is reportedly pushing back on shipments of thermal coal from Australia and Indonesia as inventories in Qinhuangdao and Guangzhou, as well as at coastal power stations, continue to swell.

Shanghai-based Macquarie commodities analyst Graeme Train said the upturn in inventories was driven by lower economic activity, which has reduced demand for power. Inventories have also been growing in line with booming supply from South Africa and Indonesia.

Here is the latest chart for thermal coal:

Also from the AFR story:

…China increased its steel exports last month by 9.9 per cent to 4.2 million tonnes compared with 3.82 million tonnes in October, taking advantage of the lack of interest in high-priced Japanese steel and capturing market share in Korea.

China’s iron ore imports for November were up sharply after October figures were affected by the week-long national holiday. It imported 64.2 million tonnes last month, up 28.6 per cent, on cheaper prices. But China’s crude steel output fell 8.8 per cent to 49.9 million tonnes in November.

“The industry is operating below cash break-even and [there is] low interest from traders to stockpile iron ore, iron ore imports will go down in December in our view,” Royal Bank of Scotland analyst Jeannette Sim said.

Here is the latest chart for metallurgic coal (which is delayed a week or so):

And finally, here are the ore charts. First, China port inventory, which looks eminently well supplied:

The ore price:

And finally, 12 month ore futures which have led declines:

That’s not a pretty chart. The fibonacci’s tell us that we had a market unable to get back through the 38.2% retracement level and confirm a clear down trend. It’s back below 120 initially and if goes through the $113 low, it’ll be past $100 before you pass Go. My guess is that’s exactly where we’re going.

These three commodities make up half of Australia’s terms of trade. The first few months of next year are not going to be kind to the TOT. Not kind at all.

Comments

  1. Steel output down.
    Ore imports up.
    Ore inventories up.
    Ore prices down.

    I’m not very bright, not half as bright as the boffins Parko can call on, but I can see this market is only heading one direction in the short term. Why is Parko not worried?

    • When a senior government bureaucrat is optimistic when it all goes to sh*t it’s time to run for the hills.

    • Oh I missed that little tidbit about about booming supplies of thermal coal from South Africa and Indonesia.

      Booming supplies of cheap coal. That’s gotta be good news for the planet hasn’t it?

      • Now that’s a loaded question: “Did I start early on the turps.”

        If I say yes I’m implicated.

        If I say no I’m admitting I always start on the turps, just not so early.

        Sell ’em dirt!

        • Your mind is working fine so… I have a business propersition. I see a unique oportunity with the immenent french downgrade affecting peoples tastes. Lets start making nice green mud pies. I am sure Rumple will have at least one each morning as he cycles to work. It would be a good value add and solve our manufacturing problem.
          I dont like eating raw dirt.

  2. More signs of a global recession IMO. The worrying thing for Australia is that our ToT will drop; no alarm bells is Canberra going off? 2012 is going to be a treat ….

      • LoL a real pattern developing here today.

        Manufacturing…no…sell em dirt.

        There must be a rapper on MB let’s have a rap about this.

        • Sell em Dirt Make em Desert
          Charge more,spend more
          Take out a loan,and buy it back refined
          Insure it ,and call it a service ..Holey heck,I’m bored….What’s next,make more Dirt ,no buy scrap-yards …..cheers JR

      • When everybody watches prices heading for the moon
        The urge to buy is like the piper man has played his tune
        And all of us rush in and borrow every cent we can
        Why be too late? It’s mad to wait! Let’s buy it off the plan!

        chorus:

        Flippin’ houses, Flippin’ houses
        Flippin’ Flats in Condo Heaven
        Let’s all buy six or seven
        We’ll all be millionairs!

        Some clever banker figured out a way banks couldn’t lose
        They’d make a it on the fees each way (and land-laws they’d abuse)
        They’d bundle, tranch, get tripple A’s and boast their quality
        And bet against the very shit they sold to you and me

        (chorus)

        The US housing bubble crashed and trillions disappeared
        Economists they scratched their heads and thought it all quite weird
        Old Greenspan he’d backed down from pressure when he’d caught a wiff
        While “housing crash” Rubini cried and so did Peter Schiff

        (chorus)

        The Old World followed soon enough and Iceland crashed and burned
        Then all the PIGS they followed suit and so their bonds were spurned
        The Euro? Well i guess it’s dead good riddance i suggest
        Until they each go separate ways what madman would invest?

        (chorus)

        And China? What a total joke! Their madness trumps us all
        They bid up prices none could pay and now we watch them fall
        The engine of the world it seems is headed down the drain
        And everywhere and everyone will join them in their pain

        (chorus)

        But we’ll be right mate here in Aus – we’re different don’t you know
        Our land is better land than theirs our thinking’s not so slow
        You can not lose investing in our city CBDs
        And even world depression will not bring us to out knees

        Flippin’ houses, Friggin’ houses
        all my dreams are shot to hell
        all my money’s gone as well
        horseshit’s worth more than my shares

        pop

  3. Albert Edwards – “There is so much spare capacity that they (China) will start dumping goods, risking a deflation shock for the rest of the world. It no surpise that China has just imposed tariffs on imports of GM cars. I think it is highly likely that China will devalue the yuan next year, risking a trade war,”

  4. I am not sure BHP and RIO have adequately priced this in, or their second derivatives CBA, ANZ, NAB & WBC. Is it the dividend huggers holding up their respective share prices, people scrambling for perceived safety or just the utter tidal wave of cheap liquidity which keeps equity prices disconnected from what is happening in the commodity and debt market (particularly CDS)?

  5. although I will inevitably be labelled an uber bear, doesn’t this news plus downgrade of banks inevitably lead to a broad selloff in the ASX200?

    Combined with the plunge in gold and oil (both down 5%), there goes the COMPLETE ASX8.

    As we know, only the ASX8 is providing profit growth for the whole ASX50.

    Futures are pointing to a 40 point drop and the AUD is below parity against the USD.

  6. H&H, how much of the effect of a downturn of coal and iron ore exports on the ToT is likely to be offset by changes to the exchange rate?

    I think we have been here before, but I need to be reminded of the answer.

    • “The strong relationship between the value of the Aussie dollar and global commodity prices also results in volatility in the terms of trade. A decline in the dollar will increase the price of imports, while a contemporaneous adjustment in the price of commodities will reduce the price of exports. As a demonstration, a 15% decline in the AUD (in trade weighted terms, which is where the dollar was at in Sept 2009), coupled with a 30% decline in iron ore and coal only, would result in a 30% decline in the terms of trade.”

      From here
      http://www.macrobusiness.com.au/2011/10/the-resources-curse/

      • Thanks Rumple, that answers the question regarding commodity prices, I presume then that a decline in volume just makes things worse still.

        • I’m not sure volumes will be much affected by price falls. If prices start to fall, wouldn’t you try and ship as much as you could now, in case prices fall even more?

          • You might, but part of the post is saying that inventories in China are high, implying that lower volumes are likely in the near future.

            I guess it depends on who takes the hit. Vale have blotted their copybook with the Chinese recently.

      • Hang on, I revise that response. Lower volumes of iron ore and coal would mean they were a lower proportion of the export basket used to calculate the ToT. This might ameliorate to some extent the effect of lower prices for iron ore and coal.

  7. One gets the feeling Q1 2012 is going to be an interesting quarter (globally and Down Under).

    Still waiting for the AUD to crack…

  8. Great charts. So the China implosion has begun it seems.

    People generally seem to underestimate the importance of house building in a economy. When I move house I have noticed it precipitates all manner of extra expense. When time are hard you just stop building houses and buying carpet and sofas. Whole sectors of the domestic economy are idled.

    As their economy collapses I assume they eventually go from a commodity importer to a commodity exporter at some point. Any idea which commodity is likely to be first?

      • Less money is never good when compared to more money. The reason the guvmint wanted a windfall tax on mining is because of windfall profits. Who seriously expects windfall profits to last forever? At current prices the margins for miners, and hence profits, remain huge and would be the envy of most other companies in this country.

    • I’m here. Saw this post this afternoon. Much the same as at least twenty others I have seen here. All with enthusiastic contributions from the usual suspects.

      Frankly, I’m a bit over it. This cheerleading toward any demise in the resources sector is getting tedious. And repetitive. If and when it happens, it happens.

      I’ll let the resident experts at MB do the talking.

      • RMA You are right. FWIW we have an accommodating range where business remains attractive. Of course we like the heady prices but are fully cognizant of entering a period of increased pricing volatility. Some expert (Merrill’s?) recently gave price range $120-$160 over coming months – my comment at the time was I thought this a little optimistic at either end.

        Cheers.

  9. Is it a bad thing? Really?

    I guess it depends on your time horizon.

    Tell you what, let’s look long term for a minute. How about we all open Excel and Wikipedia.

    Done that? Ok, now copy the global known reserves for coal, and the last few years production into Excel.

    Now work out the average increase in the rate of production over the timeframe.

    Now apply that average to the next year, and remove that from the reserves of the year after. Extrapolate it out until you reach the magical year when global coal reserves are zero.

    Jaw hit the floor yet?
    .
    .
    .
    .
    .
    .
    .
    .
    .
    Spoiler: 2052.

    Let that wash around your brains for a minute. How old will you be? How old will your kids be? What happens to our civilisation when we suddenly lose the most practical method for making steel?
    What does a post-steel civilisation look like?
    You don’t have to believe in global warming or saving the planet to realise the very real danger we face by not shifting to alternate sources.

    I say this is a damn good thing in the long run – long after we’ve all forgotten everything about the year 2011.

    • You’ve assumed continued exponential growth in coal use in that calculation. Aint gonna happen going forward.