October 24, 2011
Base Metals Fall As Europe Flounders And Chinese Buyers Pay Less For Iron Ore
By Rob Davies
www.minesite.com/aus.html (Free Registration)
Like a soap opera, each stage of the European financial crisis leaves viewers desperate to see what will happen next. Equally, just like a soap opera, we know that nothing really changes. The French don’t like the Germans, and vice versa, and no one trusts the Greeks. And even more important than the internal divisions, is the need to remain united in order not the give the Anglo Saxons the opportunity to gloat and say we told you so.
As the situation in Greece deteriorates the size of the haircut needed to make the numbers work increases. At the end of week Bloomberg reported that a 60 per cent cut in the value of Greek debt is needed to get its debt to GDP ratio down to 110 per cent. While that is still horrific, it’s probably tolerable.
But as an indication of how far there is to go, French banks are still dragging their feet about taking the 21 per cent write-down agreed in July. As these banks are some of the largest financiers of commodity traders, that directly impacts liquidity and hence metal prices.
Meanwhile credit markets are taking an increasingly dim view of French and German sovereign debt. While the ratings agencies are behind the curve as usual, money managers have pushed credit default swaps up to 191 from 108 for France and up to 93 from 59 for Germany. It may be a soap opera, but this drama is being played out in slow motion.
Given this backdrop it’s perhaps not surprising that base metals fell 6.9 per cent last week, as measured by the LME index. The reality, though, is that this fall was less about Europe and more about China.
After all, nothing concrete had been decided in Europe. Instead, commodity traders focussed on the news that Vale, the Brazilian miner, had dropped its prices for the iron ore that it sells to China. Although some viewed this move as effort on the part of Vale to take market share from the Australians, others took it as a more bearish assessment of the Chinese economy.
But while it’s true that the latest growth figures for China have dropped, at 9.1 per cent for the quarter, down from 9.5 per cent and 9.7 per cent in the previous two, it is not really a train crash.
Even factoring in the efforts by the Chinese government to reduce the growth rate to eight per cent steel experts are still predicting the country will produce 750 million tonnes of steel in 2012. Steel production is a key component of industrial production and is good a guide to base metal consumption. You can’t have one without the other.
It is fair to say that concerns over the bubble in the Chinese property market are rising. There is also some anecdotal evidence that some investors might be seeking to lock in capital gains made in China by diversifying overseas.
Nevertheless, China remains the only game in town for commodities. Until Europe and the USA, to a lesser extent, get their financial houses in order, these regions will continue to provide more entertainment than growth. But with the added frisson that Europe could erupt into a spectacular pyrotechnic display at any moment. Now that’s a soap opera worth watching.
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Base Metals Fall As Europe Flounders And Chinese Buyers Pay Less For Iron Ore
By Rob Davies
www.minesite.com/aus.html (Free Registration)
Like a soap opera, each stage of the European financial crisis leaves viewers desperate to see what will happen next. Equally, just like a soap opera, we know that nothing really changes. The French don’t like the Germans, and vice versa, and no one trusts the Greeks. And even more important than the internal divisions, is the need to remain united in order not the give the Anglo Saxons the opportunity to gloat and say we told you so.
As the situation in Greece deteriorates the size of the haircut needed to make the numbers work increases. At the end of week Bloomberg reported that a 60 per cent cut in the value of Greek debt is needed to get its debt to GDP ratio down to 110 per cent. While that is still horrific, it’s probably tolerable.
But as an indication of how far there is to go, French banks are still dragging their feet about taking the 21 per cent write-down agreed in July. As these banks are some of the largest financiers of commodity traders, that directly impacts liquidity and hence metal prices.
Meanwhile credit markets are taking an increasingly dim view of French and German sovereign debt. While the ratings agencies are behind the curve as usual, money managers have pushed credit default swaps up to 191 from 108 for France and up to 93 from 59 for Germany. It may be a soap opera, but this drama is being played out in slow motion.
Given this backdrop it’s perhaps not surprising that base metals fell 6.9 per cent last week, as measured by the LME index. The reality, though, is that this fall was less about Europe and more about China.
After all, nothing concrete had been decided in Europe. Instead, commodity traders focussed on the news that Vale, the Brazilian miner, had dropped its prices for the iron ore that it sells to China. Although some viewed this move as effort on the part of Vale to take market share from the Australians, others took it as a more bearish assessment of the Chinese economy.
But while it’s true that the latest growth figures for China have dropped, at 9.1 per cent for the quarter, down from 9.5 per cent and 9.7 per cent in the previous two, it is not really a train crash.
Even factoring in the efforts by the Chinese government to reduce the growth rate to eight per cent steel experts are still predicting the country will produce 750 million tonnes of steel in 2012. Steel production is a key component of industrial production and is good a guide to base metal consumption. You can’t have one without the other.
It is fair to say that concerns over the bubble in the Chinese property market are rising. There is also some anecdotal evidence that some investors might be seeking to lock in capital gains made in China by diversifying overseas.
Nevertheless, China remains the only game in town for commodities. Until Europe and the USA, to a lesser extent, get their financial houses in order, these regions will continue to provide more entertainment than growth. But with the added frisson that Europe could erupt into a spectacular pyrotechnic display at any moment. Now that’s a soap opera worth watching.
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