The iron ore equities short squeeze is tightening impressively today, with doomed companies flying left right and center. Chart from the SMH blog:
The Flash PMI was good but that was no surprise. As I wrote last week, China has found a nice little equilibrium for the time being as stimulus offsets the accelerating real estate bust. But, in all likelihood, as the year goes on it will be the latter that challenges the temporary stability. Evidence of why is illustrated today by the release of China beige book. From Bloomberg:
China’s economic slowdown deepened this quarter, as capital spending showed weakness and fewer companies applied for credit, a private survey showed.
Half of businesses reported higher investment, the smallest proportion and the sharpest drop since the survey began 10 quarters ago, according to the China Beige Book, a report published quarterly by New York-based China Beige Book International.
…“Since investment has been the engine of the economy for the past seven years, this weakness has sweeping effects on sectors, regions and gauges of firm performance,” Leland Miller, president of China Beige Book International, said in a statement with Craig Charney, director of research and polling. “Overinvestment has been an addiction and withdrawal symptoms will not be pretty.”
Fewer companies than in the previous survey in March said they expect to increase investment in the next quarter and the proportion that anticipate cutting spending increased, according to the report.
For the first time since the China Beige Book survey began in 2012, no sector showed an improvement compared with the previous quarter, according to today’s report. Transportation, mining and retail slowed and services weakened more sharply.
The key fading sector was real estate, which constitutes some 16% of GDP but roughly 50% of steel-related investment. It’s quite possible for aggregate growth to motor along while real estate keeps falling, taking steel down with it, which is what I expect.
But today the squeeze sure has the upper hand and is being led by Chinese markets with Dalian iron ore futures flying 2% and rebar futures up 1.2%. There’s enough momentum here to suggest it might run a while. Another great shorting opportunity.
