Not sure if these guys got the news yet.. But with that kind of money being put into the markets for infrastructure, commodities will rise from housing, commercial, industrial and or even recreational developments.. Since China just jumped the gun before the Jackson Hole meeting, I wonder if Beany Boy Bernanke will have no choice but to follow suit thus Europe as well.. If so.. Got Gold, Silver, Copper and Iron? I do!
Go BOB!! Getter done.. I see I am not the only one that agrees, photos are a good thing.. lol
Revisiting the Chinese slowdown… New low for an iron-ore giant… Easing in Australia… New highs for royalty companies… Happy feedback…
In today's Digest , we'll discuss the "Chinese slowdown."
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The world knows we're in the midst of a slowdown in China. But the question remains… can China's government – with its $1 trillion-plus in foreign reserves – manage this slowdown? Or will we see a severe economic contraction, a so-called "hard landing"?
We've been tracking bearish news from China in these pages all year. In May, we told you that commodities trading firms claim Chinese clients are asking to defer delivery of goods …
As news service Reuters reported, China was up to its ears in iron ore and copper. Its metal storage facilities were so full, it was storing excess iron ore in granaries. And it was storing copper in areas previously used to store cars. From the article:
At Qingdao Port, home to one of China's largest iron ore terminals, hundreds of mounds of iron ore, each as tall as a three-story building, spill over into an area signposted "grains storage" and almost to the street.
Hedge-fund managers like Jim Chanos and Hugh Hendry have been shorting China for years… They believe government malinvestment – like the kind we're seeing with this slowdown – will cripple the country.
As we wrote in the May 14 Digest …
| They point to the hundreds of billions of dollars China has spent on unused infrastructure projects and real estate developments. They also point to China's trillion-dollar-plus "shadow banking" sector. This is a network of lenders that don't appear in government statistics. (You can learn a few basics in this article .) |
| This "shadow banking" sector goes unreported in government numbers… But bears say it helps mask a giant amount of bad loans in China. They say it's "the Next Subprime." |
And back in June 2011 , Porter told Digest readers…
| [China's boom] has all been fueled by debt and fixed-asset investments (land, buildings, equipment, and machinery). Consider just a few of these facts… |
| Fixed-asset investment remains greater than 50% of GDP in China, for the 12th year in a row. No other country has ever had more than nine years of this kind of sustained fixed-asset investment. |
| In the first five months of 2011, fixed-asset investment grew by 25.8% according to China's National Bureau of Statistics. That's $1.39 trillion worth of investment. |
| Jim Chanos, the famed short seller, says China is currently building 30 billion square feet of commercial real estate. That is enough to provide every person in China with a five-square-foot cubicle. |
| Jeremy Grantham, one of the world's most astute investors, points out that China has been purchasing gigantic quantities of raw materials. The scale of these purchases makes them impossible to sustain. China makes up 9.4% of the world's economy, but it is currently consuming 53% of the world's cement, 47% of the world's iron ore, and 46.9% of its coal. |
| A massive increase in China's domestic debt fueled this investment. In 2010, for example, Chinese banks extended $55 billion in loans – up 95% from the year before. Now, banking regulators are increasing reserve requirements, greatly reducing the amount of available credit. In May, lending was down 25% versus last year. |
Not everyone is bearish… For example, legendary investor Jim Rogers is still bullish on China. He thinks fears are overblown. But the market disagrees…
To see how China is faring, just look at the world's largest commodities companies – like Brazil's Vale (one of the world's largest producers of iron ore) and BHP Billiton (one of the world's largest mining companies).
China consumes over 60% of the world's iron ore. It's the world's No. 1 consumer of coal. And it will likely overtake India as the world's largest gold consumer this year. So when China slows down, these large commodity companies feel it.
Today, we'll focus on iron ore. As we wrote in May …
| [ Iron ore is ] one of the most common commodities in the world. It's a low-margin business and the textbook definition of a "boring commodity" – as opposed to gold or rare-earth metals (which are, by definition, rare). It wasn't until the Chinese growth story caught investors' imagination that iron-ore took off. |
| Take a look at this chart of iron-ore prices going back to 1900 (from Chanos' presentation)… The price declined for 100 years… until China came onto the radar. |
| Now, Chinese demand is slowing (at the same time iron-ore producers are ramping up production). |
Now take a look at this two-year chart of Vale. Shares have fallen more than 50% in the last two years. They're currently trading at a three-year low… Vale is clearly feeling the Chinese slowdown.
And recent news shows we're still waiting for the bottom of this trend… A preliminary HSBC China Manufacturing Purchasing Managers Index fell to a nine-month low of 47.8 in August (down from 49.3 July). That's the 10th-straight month of declines. (A reading below 50 indicates a contraction in manufacturing activity.)
"Chinese producers are still struggling with strong global headwinds," an HSBC economist said. "To achieve the stated policy goal of stabilizing growth and the jobs market, Beijing must step up policy easing to lift infrastructure investment in the coming months."
Wenjie Ge, an analyst for Japanese investment bank Nomura, wrote in an August 21 note, "A slowdown in mining investment in China has just begun… [The downturn] may last longer than the market expects."
Ge forecasts a 27% decline in excavator sales this year. That's bad news for companies like Caterpillar (CAT)…
Caterpillar – the world's largest manufacturer of construction and mining equipment – is slowing its operations in China. It's slowed production at its two largest Chinese factories… and completely shut down operations for two weeks last month, according to spokesman Jim Dugan.
CAT has also decreased working hours in China. And it's exporting production to ease excess inventory after a projected increase in sales didn't happen, CAT's director of investor relations, Mike DeWalt, said this month. "The current sales level in China is quite depressed. We ended up with more inventory in China than we needed. And it's probably going to take us the rest of the year to work it down."
Australia, the world's mining hub, is preparing for the worst… The country's resources minister, Martin Ferguson, said Australia's mining boom is "over" after BHP Billiton stalled plans to build the world's largest open-pit mine.
"You've got to understand, the resources boom is over. We've done well – A$270bn ($280 billion) in investment – the envy of the world," Ferguson told ABC radio. "It has got tougher in the last six to 12 months. Look at Europe, the state of the European and global economy. Think about the difficulties in China. The commodity price boom is over and anyone with half a brain knows that."
Reserve Bank of Australia Governor Glenn Stevens said he stands ready to ease in case of a slowdown in the Australian economy (which is already happening)…
"The peak of the resource investment boom as a share of gross domestic product, the highest such peak in at least a century, will occur within the next year or two," Stevens said in a testimony to parliament.
This isn't new information… We've known China is slowing down. And we've seen the fall in mining stocks. But as Stevens said, he's standing ready to ease. So are all the other central banks around the globe. Should the situation continue to deteriorate, we'll see a massive wave of capital injected into the economy.
As we noted yesterday, the Federal Reserve is waiting to print money at the first sign of a slowdown. This money will continue to goose all asset classes (from stocks to housing)… And it will also send gold and silver soaring.
Over the last 10 years, gold has reasserted itself as a safe currency… one that can't be debased by governments. So as central banks race to devalue their currencies, money will flow into gold.
The recent market action, which we also discussed in yesterday's Digest , confirms that. As you see below, two gold royalty companies – Franco-Nevada and Royal Gold – are trading at 52-week highs.
