It may not be one of the core three (somewhat) realistic and accurate econometric indicators of China’s economy (which as a reminder according to premier Li Keqiang are electricity consumption, rail cargo volume and bank lending), but when it comes to getting a sense of capacity bottlenecks in China’s fixed investment pipeline – be it in ghost cities or the latest skyscraper building spree – nothing is quite as handy as commodity, and particularly iron ore (if not copper, which as we have explained before has a far more “monetary/letter of credit” function in China’s markets), stockpiles at China’s major ports. The logic is simple: no stockpiles means end demand by steelmakers is brisk and there is no inventory build up which in turns keep Australia, Brazil and other emerging markets happy. Alternatively, large stockpiles indicates something is very wrong with final demand, and hence, the overall economy.
One look at the chart below, which shows how much iron ore has been stockpiled at China’s 34 major ports (spoiler alert: it just hit an all time high), should explain at which of these two extremes China currently finds itself.
Here is what happened as explained by Market News:
Weak demand from steelmakers saw iron ore stockpiles at major ports hitting record highs, according to data from industry website umetal.com. Iron ore inventory at China’s 34 major ports jumped 4.56 million tons last week to 100.86 million tons as of February 14, the 2nd time it has surpassed the 100 million-ton level and matching the record of 2012. Iron ore imports were also at a record high in January, at 86.83 million tons, as steel traders boosted imports to bet on rising steel prices this year. But data from the China Iron and Steel Association showed crude steel output falling around 2% m/m in January. Average steel prices fell 0.79% last week, according to data compiled by mysteel.com.
There is another, more finely spun, explanation: monetary financing, or in other words, when it comes to China’s peculiar “generally accepted collateral”, iron is the new copper. Bloomberg explains:
Iron ore stockpiles in China, the world’s biggest buyer, climbed to a record as traders increased imports to use the steel-making raw material as collateral for credit and domestic demand remained weak.
“Imports kept piling up at ports as more cargoes are being hauled in for trade-financing deals,” Gao Bo, chief iron ore analyst at Mysteel.com, a researcher in Shanghai, said by phone from Beijing today.
While this may suggest end demand has not completely imploded, it does bring up a different set of complications: steel mill funding difficulties – perhaps the most sore topic in China nowadays.
Steel mills and trading firms in China are contending with increasing difficulty in getting funding, said Mysteel’s Gao.
“The funding situation in the steel industry was getting worse last month,” he said.
The weighted average lending rate in China was 7.2 percent in December, up from 6.22 percent a year earlier, central bank data released earlier this month show. In December, 63.4 percent of loans had interest rates above benchmarks, up from 59.7 percent a year earlier, according to the central bank.
However one spins it though, there is no denying that in addition to its on again, off again infautation with tapering and deleveraging, which usually continues right until the moment yet another shadow bank has to be bailed out, construction in China has slammed on the brakes:
Stockpiles of steel products also rose as construction activity remained weak after the Lunar New Year holidays, Gao said. Traders’ stockpiles of rebar, a building material, jumped by 65 percent this year to 8.55 million tons last week, according to Shanghai Steelhome.
One thing is certain – the biggest loser, as iron prices are set to tumble, will be Australia.
Iron ore may drop more than previously forecast to $118 a ton this year as China will be unable to absorb record supply from Australia as growth slows, Judy Zhu, an analyst at Standard Chartered Plc, said last week.
Prices may average $119 a ton this quarter, $110 in second quarter and drop to $100 in the final period of this year, Goldman Sachs analysts led by Christian Lelong said in the Feb. 11 report.
Mine supply of iron ore reached a record over the fourth quarter of 2013, “with the natural destination being China,” Macquarie Group Ltd. said in a Feb. 13 report. “With inventory build being evidenced on the back of higher imports, this will act as a buffer to buyers in the coming months,” it said.
China’s shipments from Australia’s Port Hedland, the largest ore-export terminal, rose 27 percent to 23.3 million tons last month. Increased supply from Australia, the top ore shipper, may push the global seaborne surplus to 94.2 million tons this year from 9.1 million tons in 2013, UBS AG estimates.
Rio Tinto Group (RIO), the world’s second-biggest exporter, said last month that output rose 7 percent to 55.5 million tons last quarter from 52 million tons a year earlier. Fortescue Metals Group Ltd. is boosting capacity to 155 million tons by the end of March.
And speaking of Australian iron miners, it was in late summer of 2012 when Chinese iron ore stockpiles were once again in the 100 million ton range, when iron prices crashed so bad, that Fortescue was on insolvency watch. Should the current episode of collapsing Chinese end demand persist and construction freeze persist, it may be time to short to FMGAU bonds once again.
Unless of course, China once again unleashes the ghost cities building spree. Which it inevitably will: after all it has become all too clear that not one nation – neither Developing nor Emerging – will dare deviate from the current status quo course of unsustainable, superglued house of cards “muddle-through” until external, and internal, instability finally forces events into a world where everyone now has their head in the proverbial sand.
via Zero Hedge http://ift.tt/O1hZop Tyler Durden