BHP expect Chinese iron ore demand to flatten

The Australian Government has passed its mining tax, which becomes effective on the 1st July. Great timing, especially with a slowing China – I think not;

The Chinese have raised petrol and diesel prices by 7.0% and 7.8% respectively – the 2nd price increase in 6 weeks, though petrol and diesel prices remain below cost. However, the inflation impact….;

BHP reports that Chinese demand for Iron ore has flattened and, as a result, is reassessing some of its investment projects. Should not be a surprise, though yet more confirmation of a slowing China, particularly in respect of fixed asset expenditure. BHP adds that growth of steel production has flattened, large infrastructure projects are coming to an end, though adds that steel demand will remain positive till 2025. Australia’s 1st trade deficit for 11 months in January was attributed to a decline in iron ore exports and coal;

The Chinese love to show off their wealth. However, Bloomberg reports that Mercedes are offering a 25% discount on their cars – a sure sign that all is not right. Germany has benefited recently from exports to emerging economies such as China, which has compensated for much weaker EZ demand. However…..;

Spanish banks borrowed E152bn from the ECB in February, nearly 3 times more than in the year before. Spanish banks are playing the carry trade – they increased their holdings of Spanish government bonds to E202bn in January, from E178bn in December – dangerous stuff;

Walter Munchau’s article in the FT “There is no Spanish siesta in the EuroZone” is a must read. Private sector debt was 227.3% of GDP at the end of 2010, the latest data available – 2011 data is expected to show a modest decline only. The Spanish Institute of Statistics states that Spanish residential property has declined by 21.7% on average (29.5% in Madrid) from the peak in the 3rd Q 2007. By comparison, Irish property prices have declined by approximately 50% and that assumes that there is a buyer around. Essentially, Spanish banks will have to take additional hits – the current write downs are less than half that required. Whoops. The EBA’s stress tests should be compared with those set by the FED – basically no comparison. Who is going to pay for the recap of Spanish banks and, for that matter, European banks – it is far too much for the private sector.
Spain is in a debt trap and austerity measures will just increase the problem. The country remains the largest threat to the EZ, in my humble view;

Whilst I believe that Italy is in a better position than Spain, recent data is alarming to say the least. Industrial orders fell by -7.4% in January, with domestic orders down by -7.6%. Output fell by -4.9%. Construction was down -10.9%. Mr Monti is carrying out a fiscal squeeze of 3.5% this year, well above the 1.0% in the UK, for example. In addition, he is to introduce labour reforms, which will increase unemployment in the short term – he is to meet Unions today to attempt to finalise the proposed reforms – going to take some time and will be tough. The IMF expects GDP to contract by 2.2% this year (personally, I believe that the IMF’s forecast is too pessimistic) and keep contracting in 2013, with debt to GDP rising to 127%. (Source Daily Telegraph). However, austerity measures by themselves, without growth policies, are dangerous and aint going to work, Mrs M;

Dutch March consumer confidence came in at -39, from -36 in February. The Dutch have recently announced that their projected budget deficits are likely to come in higher than forecast and that they will have to cut back further on spending. However, the additional spending cuts proposed are creating tensions withing the coalition. Holland just survived being downgraded – can’t see them holding on to the AAA. If so, then there will be just 3 AAA’s in EZ;

German February PPI came in at +0.4% or +3.2% YoY, in line with the forecasts;

The UK’s Office for Budget Responsibility is expected to increase the UK’s growth outlook this year marginally, to +0.8%, from +0.7% previously. They also suggest that a technical recession will be avoided. For 2012/13, public sector debt data will be flattered by the inclusion of £28bn from the Post Office Pension Fund. However, the UK will face annual payments for decades thereafter in respect of pension payments to retiring post office workers;

UK February CPI came in at +0.6% MoM (+0.4% expected) or +3.4% YoY, the lowest since November 2010, though slightly higher than +3.3% YoY expected. Inflation in the UK has, for years, been stickier than expected. Core inflation declined to +2.4% YoY, the lowest since November 2009 and +2.6% in January. Whilst CPI should decline closer to the BoE’s target of 2.0%, I am not as sanguine as the BoE. QE worldwide has added to energy and food prices in particular, as can been seen in US data as well.
With wage growth at below 2.0% and no major rise expected, real disposable income continues to decline;

Outlook

The main Asian markets (ex Singapore and India) closed lower. European markets have opened somewhat lower. Brent (spot) is trading around US$124.50. Gold continues to be in the doldrums – it’s down 1.0% at around US$1650.

As you know, I am bearish on China in particular, though also on emerging markets in general. I continue to increase my short positions on the miners (Rio, Vale, Anglo, and a smaller short on BHP, given its energy side). I’m also short the A$ (against the US$). As you know, shorting the miners/A$ is the main way I play my bearish China view. The miners are lower today – presumably reflecting the downbeat BHP statements.

US housing starts and building permits data to be released today. I believe that that data should show signs of continued improvement, which would have been helped by better weather conditions.

Best

Kiron