For the third time in as many months, there has been a strategic leak of the news that China's consumer price inflation last month fell last month to be down from the 6.3% the month before and the worrying 8.7% in February when it was boosted by impact of the terrible winter storms which caused price spikes in the cost of food, power and a wide list of other products.
In fact newsagencies said the inflation rate may have eased to below 6% in August, which would be the fourth straight month of deceleration. State media reported, (citing a government economist) that slowing growth in food prices and a moderate slowdown in the overall economy helped curb price increases, the China Securities Journal reported, citing Fan Jianping, chief economist of the State Information Centre.
But producer prices remain high: the hit 10% in July and the same economists expected little, if any change in August, which would at least be a small bit of good news in that the price surge is easing. The figures, to be released next week, will show that the intense competition in the Chinese retail market is forcing companies to eat profit margin to make sales. But the lower CPI will also reflect the rapidly easing cost of food, especially pork and some vegetables which were the main drivers in the rise in price pressures on consumers for much of the last year.
But that's the good news: the bad news can be found in two separate reports. This one from Bloomberg yesterday which said that Wuhan iron and Steel, China's fifth-biggest steelmaker, and Liuzhou Iron & Steel Group have formed a venture in Guangxi, China. "Wuhan Steel will own 80% of the venture while the local government in Liuzhou, Guangxi will have 20%.
Bloomberg the venture will have registered capital of 44 billion Yuan ($US6.4 billion), which is a fair whack of money. "Wuhan Steel, the owner of Wuhan Iron & Steel Co. in the central province of Hubei, will pay for the stake in cash, while the local government will use Liuzhou Steel's assets to pay for its holding, according to the statement."
Does China really need a new steel plant, now? And then there was this report in the Financial Times and in a couple of other outlets over the last day. "Growth in Chinese steel consumption is expected to slow markedly in the second half of this year amid weakening demand from the construction, household appliance and automobile industries, according to industry experts.
"Yang Siming, general manager of Nanjing Iron & Steel told a steel conference in Xiamen this week that most Chinese steel mills had cut output last month, because of shrinking demand and high costs of raw materials. "We've been cutting production since last month, and according to my knowledge, most domestic mills are cutting output too," Mr Yang said.
"According to Steel Business Briefing, the steel consultancy, steel consumption in China is forecast to grow by only 8-10 per cent in the second half of this year, as little as half the 16 per cent growth rate for the first half of 2008. "Analysts predict that the reopening of steel mills that were closed during the Beijing Olympic games will do little to boost second half output." So I suppose that will have analysts reaching for the phones and their models for BHP Billiton, Rio Tinto and those other companies presently riding the steel raw materials boom in China and elsewhere. If true, at worst this means no more price rises for a while: its just too early for this to be a negotiating tactic, although the 2009-10 price talks are due to start around late November.
If true and if the slowdown becomes worse, then the prospects of a price cut next year will increase, and that's just the thing the Reserve Bank and others would prefer not to see just as our economy's health is dependant on the boost from the improved prices for coal and iron ore this year. So the expansion plan by Wuhan might not happen, might be slowed down, or it might be completed and when it is in 18 months or so, add more unwanted capacity to an already oversupplied sector. if that happens, it would add a bit more downward pressure on pricing.
China's metals production picture has been confused by shutdowns and other plant idlings because of the Olympics, pollution reasons and a need to curtail output to try and boost prices and save power. That has been prevalent in the copper, lead, zinc and aluminium industries where the cuts are due to run out in the next month. If continued you will know that China has ample stocks of these metals for current levels of demand or can source them more cheaply from world markets.
Steel is different: the closure of plants seems to be more linked to taking older plants off line and improving pollution. But there now seems to be recognition that there's a fall in demand for steel products in China with construction, household appliances and cars all seeing signs of slowing demand. Shipbuilding remains buoyant if only because of the vast backlog yards in China, Korea, brazil and other countries have at the moment.
The knock-on effect of weakening demand for steel is already being felt in the shipping market, where the Baltic Dry Index has fallen 45% since May, as Chinese steelmakers cut production and demand for iron-ore and coking coal.
And then this news from yesterday: The world's biggest iron ore miner and exporter CVRD (Vale) of Brazil is trying to get pricing parity with Australian iron ore exports. Steel industry sources in China have confirmed that Vale has emailed Chinese customers to announce it would charge 20% more for iron ore effective from Sunday of this week, September 1.
That would bring the increase in Brazilian ore pricing in line with the bigger rise (71% vs. 86.5% average, but over 90% for some higher quality ores) that Australian miners won in July. It's more cost pressure on the Chinese industry. Vale is trying to get the pricing premium that Rio and BHP won because their mines are closer to China's mills and it costs less to ship from them than from Brazil. China's leading, Baosteel, is consulting with the government on a response to the Vale demand.
Meanwhile there was also a second bit of bad news for the iron and steel bulls in the FT. Someone very well read briefed them on an impending action the US Government will bring against China in the World Trade Organisation (WTO). If successful, it has serious implications for Australia's export iron and coal industries, the national economy and the companies involved. It could also have an impact on Brazil, Canada and Indonesia.
The FT reported, and it has been reported now by other news media, that American Government trade officials are "close to filing a case against China at the World Trade Organisation challenging export restrictions on raw materials used in steel-making and other industries. "The US has been working on the case intensely for the past few months, and could move ahead with a request for consultations – the first step in the WTO dispute settlement process – within weeks, according to people close to the discussions. "The European Union has already opened three investigations into allegations of dumping by Chinese steel producers.
"A WTO fight over China's treatment of raw materials would shake up the global steel and chemicals industries, where China has emerged as a leading producer and competitor to western companies in recent years. "The US is expected to argue that Chinese export quotas and taxes on raw materials such as metallurgical coke, molybdenum, silicon carbide and fluorspar used in steel production artificially deflate domestic prices and inflate global prices, putting US producers at a disadvantage in violation of WTO rules.
"US officials have spent the past several months narrowing the focus of a potential case from an initial list of more than a dozen raw materials to a handful of products where the US is confident that China breached the "protocol of accession" it signed on joining the WTO in 2001, one person familiar with the matter said."
The surge in Chinese steel exports in 2006 and 2007 came as the massive expansion in domestic capacity outstripped the rapidly rising local demand for steel. That surge in production has led to the current iron ore and coking coal boom for Australia, which helped keep our economy out of the red in the June quarter and could help do so again this quarter.
Complicating matters for the Americans however is the slowdown in Chinese metallurgical (coking) coal exports since earlier in the year when those bad storms hit China in winter. That saw coal diverted from the export sector to local power generation for several months. That saw coking and steaming coal prices in Asia surge (doubling for steaming or thermal coal, doubling or more for coking coal).
Even though the upward pressure has disappeared from the market in the last two months because demand has eased and some of the port congestion in NSW and Queensland has improved, spot prices remain very high. So high that they have helped force some Chinese power generators out of business this summer because they couldn't afford to match export prices for coal in the Chinese domestic market, or in the Asian spot market.
That's because their power selling costs were controlled by the Government to prevent costs from surging ahead of the Olympic Games. Now that the games are about over (when the ParaOlympics finish) analysts are watching to see if the price controls are eased and if the country's power shortage improves as more generators come back on line (Many were shut in a 300 kilometre radius around Beijing for the games to lower pollution).
But a combination of flagging demand and this possible action from the US Government could be major disruptions to demand for and prices paid for Australian iron ore and coking coal.
