The AFR this morning has an exclusive that will be no surprise at all to MB readers:
A senior official at China’s central bank has played down the need for another stimulus package or further easing of credit conditions in comments at a private meeting that suggest Australia should prepare for lower growth over the long term from its major trading partner.
Sheng Songcheng, the head of economic analysis and statistics at the People’s Bank of China, told economists in Shanghai last week that the bank wasn’t worried about China’s slowing economy, which was going through a period of structural change rather that a cyclical downturn. The comments explain why the PBoC has been reluctant to cut interest rates in recent months or reduce the amount of capital commercial banks are required to set aside, even as signs mount that China’s breakneck growth is moderating.
…One person who attended the meeting, who asked not to be named, said the central bank official’s comfort with slower growth suggested the government did not plan major infrastructure projects to stimulate the economy, a step that would drive demand for Australian iron ore and coal to manufacture steel. “The PBoC does not seem to be concerned with the current pace of growth, and is satisfied with the state of liquidity conditions,” the person said.
This is the umpteenth Chinese official to declare this. I know, there has been a recent spate of infrastructure approvals to support growth, and as I’ve argued for some months, it is likely that Chinese growth and demand for bulk commodities will be decent for the next six to nine months. But the fact is, in aggregate the stimulus is nothing like 2008/9. The AFR goes on to ask the question: what is the implication for the Treasury’s Chinese growth assumptions? Fair enough.
But more pointed today is what does this do to the price assumptions of the government’s commodity price forecaster, BREE, which yesterday released its quarterly update declaring that:
In the second quarter of 2012, iron ore spot prices averaged around US$134 a tonne for 62 percent iron ore content free on board (FOB) Australia, a decrease of 1 per cent from the previous quarter. In the September quarter 2012, spot prices have decreased markedly as concerns overfuture Chinese growth weighed on the steel-making market. For 2012 as a whole, contract prices are forecast to average around US$126 a tonne.
In 2013, the average contract price is forecast to decrease to US$101 a tonne. Contract prices in the first half of 2013 are expected to reflect the lower spot prices that have been estimated for the rest of 2012. In the second half of 2013, contract prices for iron ore are forecast to increase, based on an assumed stimulus package from the Chinese Government generating an increase in steel-related consumption demand.
Benchmark contract prices for high-quality hard coking coal delivered in the September quarter 2012 settled at around US$225 a tonne. The 7 per cent increase in contract pricesfrom the June quarter was a result of inclement weather and industrial action at BHP Billiton-Mitsubishi Alliance (BMA) mines in Queensland that contributed to lower production. For 2012 as a whole, contract prices are forecast to average around US$211 a tonne. Hard coking coal contract prices are expected to moderate in 2013, underpinned by supply increases from Australia, Canada and Mongolia.
The BREE forecasts will form the basis of all government Budget assumptions yet they are now in apparent contradiction with the PBOC.
If we had a business media, BREE would be facing the following unanswered questions (instead we have this puff):
- Why is the national forecaster running this kind simplistic modeling? Where are the alternative scenarios?
- How big was BREE’s predicted stimulus which will have direct consequences for the impact on commodity demand and prices?
- If the stimulus is small or ineffective, then what are the consequences for commodity demand and prices?
- Where is the analysis of commodity prices in the event that there is no stimulus?
- Have alternative suppliers been held constant or are their supply increases factored in?
These scenarios and surrounding analysis are basic for any competent risk management exercise and represent the bare minimum for analyzing the impact on the Australian economy through commodity producer losses, employment, government budgets, exchange rate assumptions and feeding into share prices and bank balance sheets (and I could go on).
