Chinese defaulting on bulk contracts

The World Steel Association last night released April crude steel production statistics and news is mixed:

World crude steel production for the 62 countries reporting to the World Steel Association (worldsteel) was 128 million tonnes (Mt) in April 2012, an increase of 1.2% compared to April 2011.

China’s crude steel production for April 2012 was 60.6 Mt, an increase of 2.6% compared to April 2011.

Elsewhere in Asia, Japan produced 9.1 Mt of crude steel in April 2012, up by 7.6% compared to the same month last year. South Korea’s crude steel production for April 2012 was 6.0 Mt, an increase of 2.1% compared to April 2011.

In the EU, Germany produced 3.6 Mt of crude steel in April 2012, a decrease of -5.5% on April 2011. Italy’s crude steel production for April 2012 was 2.4 Mt, down by -3.2% on April 2011. In April 2012, France produced 1.4 Mt of crude steel, a decrease of -1.8% compared to April 2011. Spain’s crude steel production for April 2012 was 1.3 Mt, down by -14.3% compared to the same month in 2011.

Turkey’s crude steel production for April 2012 was 2.9 Mt, an increase of 4.7% compared to April 2011.

The US produced 7.7 Mt of crude steel in April 2012, up by 9.3% on April 2011.

Brazil’s crude steel production for April 2012 was 3.0 Mt, -1.2% lower than April 2011.

The world crude steel capacity utilisation ratio for the 62 countries in April 2012 remained nearly unchanged at 81.1% compared to March 2012. It was 1.7 percentage points lower compared to April 2011.

Exactly what you would expect: European recession, US bouncing from a low base and lousy Chinese growth.

The last point is of course the most important. 2.6% annual growth may seem good for China but it isn’t. The last four years to April have been respectively 11%, 27%, -3.9% and 9.1%. Abstracting from the GFC you can see the problem.

It was perhaps these statistics that pushed iron ore down again yesterday. Despite the broader market rally, the miracle commodity was down another 0.31% to $130.90. 12 month swaps were better, continuing to base at $123.31. Shanghai rebar was unchanged.

The FT reports as well this morning that the Chinese are backing away from contracts:

Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets.

The deferrals and defaults have only emerged in the last few days, traders said, and have contributed to a drop in iron ore and coal prices.

“We have some clients in China asking us this week to defer volumes,” said a senior executive with a global commodities trading house, who warned that consumers were cautious. “China is hand to mouth at the moment.”

A senior executive at another large trading house also confirmed there had been defaults and deferrals in both thermal coal and iron ore.

This is reminiscent of 2008 when contracts were suddenly much higher than spot as demand collapsed. One wonders if it will be the Chinese who shortly begin tho agitate for a greater role for spot iron ore. To this we can add more colour (of a dark hue) from Reuters (h/tA63):

…according to Chinese consultancy Umetal. “There’s an oversupply of iron ore, and on the other side you have very weak demand. It’s very ugly out there,” said a Singapore-based physical iron ore trader. Supplies of iron ore from top exporters Australia and Brazil are bouncing back after disruptions due to bad weather in the first quarter. But the increased supply is coming at a time when Chinese demand is slowing along with its overall economy. Prices could eventually be at risk of falling below $100 a tonne, traders say, a level last seen in late 2009…”The ingredients are looking much worse this time given the oversupply, so I wouldn’t rule out prices hitting $100 or even breaking $100,” said the Singapore trader…”Everybody now expects prices to go further down. If I were a steel mill, I would just buy a small volume, or buy from port stocks which are cheaper,” said a trader in Shanghai. The sustained decline in steel prices has been fueling iron ore’s slump. The price of steel billet in the key Tangshan area in Hebei province, China’s top steel producing region, fell to 3,580 yuan ($570) a tonne over the weekend, said the Shanghai trader, down more than 200 yuan from late March. “Billet could fall another 10-20 yuan today, and this will put more pressure on the iron ore market,” the Shanghai trader said. Construction of many high-speed railway projects across China, big users of steel, has almost stopped due to lack of funds, said an iron ore trader in the port city of Rizhao in China’s Shandong province.

In a similar (but bullishly coloured) report in The Australian, a Wood Mackenzie analyst described a bullish long term outlook for iron ore and much higher prices in the second half. Colour me skeptical. Barring some miracle, Europe is going to get worse before it gets better and, although China may want to support growth, without turning the real estate spiggot back on they’ll struggle. That doesn’t mean much lower prices as the 12 month swap is hinting at but certainly not much higher either.

Thermal coal remains under pressure too, yesterday down to $97.50. Coking is stable for now.

Australia’s trade deficits are going to be ugly in the second half, as the following charts from the Unconventional Economist show:


China is also Australia’s largest export market (in part because of its demand for Australian iron ore), accounting for around 30% of Australia’s total merchandise exports (see below chart).

The slowing of demand for Australian iron ore, as evident by iron ore exports contracting by some -$3.1 billion over the first quarter of 2012, was a key factor behind Australia’s trade balance moving sharply negative over this period (see below chart).

Comments

  1. And I see this morning traders are saying IO below $100/t, and I see no reason after reading your post, and some links last night to doubt that.

    http://mobile.reuters.com/article/idUSL4E8GL0HY20120521?irpc=932

    I expect like other resources this will make some mines uncompetitive. I wonder how FMG will fare given their massive spend (300m to go), and now this.

    How did treasury and all the other future boom crowd get it so wrong?

    • Two things, one Manalo get’s it wrong as often as he gets it right. So caution.

      The other, calamitous events. We feel very close to the precipice of one. I am sure they would be modelled by Treasury (as they are by resource companies) but you run with the good.

      It ain’t over until it’s over. 🙂

    • How did treasury and all the other future boom crowd get it so wrong?

      Indeed. Heads should roll starting with Parko and Gruen. They need to clean out the mining boom cheerleaders from the RBA as well.

      • I guess I’m naive to expect any different, but I know I can’t trust official Chinese data, and why would we be any different here. I think we’re a lot better than China in this regard, but after speaking to some stats team leaders at the ABS (I’ve spoken to two), they are dedicated, but I’m sure they don’t get it right, and like all stats collection if you throw away samples, or don’t collect sufficient samples, the result is invalid.

        Also, IMO there is a lack of transparency in what we’re presented with. We get fed the swill that they think we want to hear, and they need to provide to keep the allusion of stability to the markets.

        The big issue is, if this does fall off the cliff, and we’re got stuff all as an economy to fall back on, the average Joe is going to be pretty upset. Like the GFC … didn’t see it coming, and blame the EU or anyone other than the ruling class.

        Better calm down now …

      • They have a stated cost base of $52/t but what they don’t tell you is what their minimum tonnage to stay profitable is.

        One article I read some time ago from a BHP media release was they needed to see ore at $200/t to make the outer harbour project at Hedland a viable business proposition.

        • Boys were saying as many miners have signed take or pay contracts, it will likely be better to keep going at a small loss than slammed by stopping all together.
          Thinking is vol will be there irrespective of price

  2. HnH. Contain yourself. Decorum please.

    Deferral is not unusual, cancellation is. My recent understanding was a number of shipments deferred, at the time none Australian sourced iron ore. Rumblings of prospects of cancellation for ore shipments by mid-size steel producers, ore from none of the three majors. Aside from unease felt by all at the EU situation, a little argy bargy and some hold off for June with expectation of lower prices. Wait and see. Steel production remains at all time high.

    A little stimulus would be welcome and remember “It ain’t over until it’s over.”

    • A little stimulus would be welcome…

      Pathetic.

      You’ve been rolling in cash for a decade, decrying every policy measure to assist Australia’s trade-exposed sectors, and at the first sign of a slowdown you’re begging for stimulus! How are you better than a real-estate spruiker begging for stimulus after a decade of booming property prices?

      • Not begging, suggesting. Would be welcome, I’m sure you agree.

        You repeatedly fail to comprehend that stimulus undertaken in China is at no cost to Australian taxpayers – yet we too benefit. Win win.

        • No, you benefit from billions of Chinese taxpayers hard-earned cash. Most Australians, living and working in the slow lane of the Australian economy, don’t benefit.

          I can think of nothing better (for China and Australia) than a gradual transition from an investment-led economy to a consumption-led economy. It would restore some balance to both our economies.

    • “A little stimulus would ”

      bots are smart now, they can even push red buttons automatically.

        • 3d wer’d dogo make 1 !!

          “would read little bots are stimulus mad smart buttons,even now they automatically push can..jason”

          • You’re back! 🙂

            Well everyone else has kicked the can and you can bet your arse that China will to. And it might work.

          • Yeah back like a forgotten ring pull once canned, found betting something that works for something that might…you wish, sounds empty..but hey don’t worry,I learn quick,n first up just tell me, How full is the can ..sounds you might need a Plumber.. Cheers JR

    • 3d1k i think you are right the Chinese government will most likely stimulate (not by reducing interest rates) as soon as they realise that a hard landing would be unavoidable. The article that said that the chinese would not have the cohesive attitude to engage stimulus like in 2008 unestimated the ruling powers ability to force the regional governments to do their bidding

  3. Diogenes the CynicMEMBER

    Quelle surprise! – China is slowing and not honouring their contracts.

  4. “The slowing of demand for Australian iron ore, as evident by iron ore exports contracting by some -$3.1 billion over the first quarter of 2012, was a key factor behind Australia’s trade balance moving sharply negative over this period (see below chart).”

    HnH. This is more a reflection of price decline not demand decline, April 2012 PHPA showing YoY ore exports substantially higher.

  5. Four years ago – not long before the great crash – the China boom was in full swing, but they were only paying a third of the price reached last year, following huge Chinese anti-GFC stimulus.

    Barring a committment to further large, ongoing stimulus, perhaps red rocks are quite overvalued at $190 a tonne or even $100 a tonne?

    • $190/tonne. Krugilicious days. Vale are optimistic as to their return. Personally, I’m a little more pragmatic.

  6. 3D1K you are forever on MB do you really have a day job or is it true that your a Mining PR Spam Pron Bot?

    Respectfully asked of course as you post so much all day!

    TM.

    🙂

    • Currently, 3d1k has made 5.1% of all published comments on Macrobusiness since inception.
      I remember one day there was one comment every six minutes.
      Join the dots….