FIVE Chinese steel mills have revealed plans to cut production by up to 20 per cent over October.
Evidence has emerged that real-economy stresses are being created in emerging markets by the Western credit crisis.
The prospect of wide-ranging and unexpectedly deep cuts in Chinese steel production have surprised Australia's major iron ore and coal producers and fed fears that China is more closely "coupled" to the global economy than anyone has wanted to believe.
While confidence in China's medium and long-term economic prospects remains very strong, there are fears of a material drift in demand for Australia's key raw materials over coming months.
As the leaders of the western economic world bashed our rescue packages -- which many now maintain could prove the turning point in the swirling financial crisis -- four of China's domestic steel producers were reported to have instituted production cuts of 20 per cent in the hope of driving a recovery of steel prices.
As that prospect was being digested by Australian iron ore exporters, Reuters started carrying reports that China's biggest steelmaker, the mighty Baosteel, was going to follow the juniors' lead and reduce output by a million tonnes, or nearly 10 per cent, over the next quarter.
Just a month ago, speculation about material cuts in China's December quarter steel production would be have been greeted with considerable and justified scepticism by our iron ore miners.
Back then there was a view that, while the September-October numbers might be below trend, China's economy would ramp up very quickly after theOlympic induced capacity shutdown.
Only two weeks ago the president of BHP Billiton's China operations, Clinton Dines, delivered a series of investor briefings in Sydney in which he emphasised the resilience of China's domestic economy.
The Dines thesis is that China is less dependent on export markets than many believe, that core raw materials demand is driven by domestic infrastructure investment, which is funded by private savings rather than imported capital. So, China will be resilient in the face of external frailty.
That all sounded OK until Mt Gibson revealed last week that some customers had asked for delays to iron ore deliveries.
Mind you, there was comment even then that China was merely indulging in a little bit of price negotiation theatre. Revelations by Fortescue yesterday that some of its September revenues has been recorded as debt in its quarterly cash statement will reinforce worries creeping through the mining sector.
Fortescue's issue is that "cash has not yet been received from confirmed bank letters of credit". And that would seem to indicate some of its customers are having trouble getting their hands on the US dollars necessary to support their credit lines.
If that is the case, Fortescue's customers are not alone. Around the globe, the deep freeze in capital markets is constraining the normal processes of business, be it securing currency swaps, raising commercial paper funding or securing interbank lending.
The thing is though we thought China might well be immune from these problems. It is not.
That said, it would seem that, for strategic and political reasons, Fortescue is unlikely to feel the brunt of any production cuts. Its status as the new force in iron ore is treated most seriously in China and it is expected to remain a supplier of choice for that reason.
Similarly, BHP's determination to meet all its contract requirements rather than use loopholes to shift tonnage into spot markets is likely to see it rewarded.
But there are rumours in the market that Brazil's Vale could well lose tonnage in the wake of its ill-timed attempt to win mid-year price hike of up to 12 per cent. And there is speculation, too, that Rio Tinto, which has played contract hardball and sold tonnage into the spot markets, might yet pay a price.
Needless to say, there is irony aplenty in what is a broadly coordinated cutback in Chinese steel output and that its stated aim is to manipulate higher domestic steel prices prices -- remember China Inc objects to BHP's takeover of Rio on the ground of market power.
Credit is due
THE the first thing to observe about the weekend's concert of government intervention in the global banking system is that it has been received extremely positively here and around Asia.
Confidence, or its utter destruction, is an elemental force driving the now terrifying erosion of the global financial system.
So, yesterday's relatively exuberant welcome to this extraordinary government intrusion into the workings of capital markets is, of itself, a potential means to an end.
The hope is that the cohesive but purpose built collection of plans to rehabilitate banking systems across the globe will set a foundation first for stability and then, more distantly, for recovery.
The second thing to note is that, give credit where it is due, the federal Government's decision to guarantee all bank deposits is as brave and unprecedented as it is correct.
And it is also a portent of the potential of this crisis to yet rip a black hole into our financial infrastructure.
As the nature of the threat to the international financial system became dreadfully apparent through 2008, Australians have been well served by its government and regulators.
Yes, this latest jump into the unknown flies in the face of 30 years of financial market deregulation and it has the free-marketeers pondering the principles of moral hazard and the idea that failure is essential to a thriving economy.
There are valid questions raised, too, about the duration of the Rudd Government's guarantee and how and when the banks and their customers will be weaned off their comforting new security blanket.
And, anyway, haven't the banks, regulators and government been telling us for the past 12 months that our banking pillars are well capitalised, well-operated and prudently provisioned? So why is the guarantee necessary?
Fair points all. And the Rudd Government has been expedient in ignoring them and opting instead to protect the effective operation of our financial system ahead of the crisis which would make this policy necessary.
The problem for government, regulators and industry alike is that pretty much no one has been able to accurately anticipate the path of this creeping crisis.
There is a view that with the US, Britain and Europe either partially nationalising or directly underwriting their banking systems, Australia had little choice but to match the guarantees now implicit in those banking markets. There are two very practical roots to this view.
One is a fear of the sort of capital flight, which has been seen in Europe when retail deposits have been shifted from un-secured banking markets to those where deposits have been guaranteed.
The other is that our four well-managed members of the world's rapidly diminishing class of AA banks would unfairly lose their competitive advantage in sclerotic term funding markets, as the now government-backed, recapitalised Euro-banks go looking for funding.
Ultimately, though, the big issue in banking is that trust is dead. As banks have been left insolvent by losses in the withering trans-Atlantic property markets, faith in the broad system has evaporated and resulting credit-freeze has left economies around the globe in a collective suspended animation.
The illiquidity of the banks only further undermined the already fragile economies of the US, Britain and Europe.
And now even the economies of robust outposts of the OECD, like Australia, are being sabotaged, as the developing nations driving our prosperity start coming to terms with the reality that they remain as coupled to the world as ever they were.
The final point here is that, as one leading banker said yesterday: "Even the Europeans have now recognised that the problem is their's, as well, and that their inaction is amplifying the danger. Now everyone is doing their best to deal with all four areas of the banks' issues, liabilities, assets, capitalisation and funding.
"So really, if this doesn't work, then what will?"
And that is a scary thought indeed.
information from worldscrap.com
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Chinese steel cut worries Aussie mining companies
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Posted - 10/14/2008 : 03:47:15
