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China News & Analysis

August 26, 2014
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Iron ore price horror: near five year lows

Ordos, Inner Mongolia. China's notorious ghost city. Source: news.com.au

Ordos, Inner Mongolia. China’s notorious ghost city. Source: news.com.au

Michael Sainsbury

The iron ore price fell below US$89 per tonne today, its lowest mark in almost five years, and it is set to fall even further with China’s housing market – which has underpinned the commodity for the past few years – showing no signs of recovery , despite some stimulus efforts by the ruling Communist Party.

Falling 3 percent in the past week closing this evening at US$88.90 for the benchmark 62% Fe landed at China’s northern port of Tianjin, iron ore is now down more than 33 per cent since the beginning of the year, according to Platt’s The Steel Index and at its lowest pint since October 2009.  In June this year it hit US$89 per ton, matching the previous 4 year low of September 2012 which famously sent Fortescue Metals Group scurrying around the global seeking  would eventually be an extra $5 billion in debt funding.

FMG has used the two years since then to pay off debt and dramatically cut its cost per ton. The company now says that its break-even price if below US$70 per ton.

But other smaller iron ore mining companies will not be so lucky, with prices at these levels some junior miners may be looking at fore sales, news reports have suggested. Vulnerable companies are led by Gindalbie  Metals which has a break-even price of US$90 per tonne but others including Atlas Iron, and Mount Gibson –  will also now be coming under pressure

The sliding iron ore  price comes as seaborne volumes of the commodity have continued to surge as major new mine, and mine extension, projects by the world’s largest iron ore miners Rio Tinto, Vale SA and BHP Billiton have come on line,  supplies are forecast to continue rising over the the next few years as Vale, in particular, looks for a major expansion and a number of African projects get under way.

Supply is soaring  just as demand in China continues to fade amid growing fears that the problems in the country’s housing market could lurch form problem into crisis. China is expected to see a rise of less than 3% in steel making next year compared with last year and some analysts believe steel production in 2015 could be flat, helping to push iron ore price to US$80 or lower.

House prices in 55 of china’s 70 largest cities fell in June from a month earlier, the FT reported.

“China’s real estate market seems to have reached a turning point,” said Zhu Haibin, a JP Morgan economist, in a recent report. “A housing market slowdown is the major near-term macro risk in China.”

Look out below.

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August 26, 2014
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Palmer’s China comments could scupper trade deal

Clive Palmer

Clive Palmer

Michael Sainsbury
Crikey, www.crikey.com.au, 25 August, 2014

Clive Palmer’s anti-Chinese government comments last week — they are “bastards” and “mongrels” – could not have come at a worse time for Prime Minister Tony Abbott and Trade Minister Andrew Robb.

Chinese President Xi Jinping is preparing to bring more than 400 people — the largest business and political delegation from the country ever to set foot in Australia — to our shores to coincide with the G20 summit in Brisbane. At the same time the Australian government desperately wants to finalise a free trade agreement with China that has been in discussions for nine years.

The entourage will include potential investors for every sector of Australia’s fraying economy, and Crikey has also learned that Xi will be bringing at least five leaders of the six major Chinese east coast provinces, which have “sister state” relationships with Australian states. These are the southern economic powerhouse of Guangdong, China’s most populous province with 104 million people, and sister state to New South Wales; Zhejiang, sister state to Western Australia and home to the famous entrepreneur breeding ground city Wenzhou; Shanghai (one of China’s four city-state municipalities), which is “sistered” with Queensland; Shandong (South Australia); Jiangsu (Victoria); and Fujian (Tasmania).

More sophisticated people in Beijing dismiss Palmer’s spray — once a key China supporter (after all, the country has made him rich), he is in the midst of a grubby legal battle with China’s state-run CITIC Pacific over its disastrous purchase of the rights to mine the $10 billion Sino Iron project. It’s not insignificant that Palmer sold them a pup (excuse the pun) although they bought it with eyes wide shut.

But not everyone was amused by his comments. The Communist Party’s Murdoch-inspired tabloid The Global Times called him a “prancing provocateur” and said: “China must be aware that Palmer’s rampant rascality serves as a symbol that Australian society has an unfriendly attitude toward China.”

Chinese social media was also set alight by his comments.

The fracas also means Abbott and Robb now face fresh pressure on an already fraught, self-imposed deadline to get a free trade agreement signed with China before the end of the year. And Palmer’s raising the subject of Chinese ownership of Australian assets — a significant concern within the National Party — will make it more difficult to sell an FTA that gives more away to China.

Anti-Chinese ownership sentiment will make all it all the more difficult for Abbott and Robb to hand China the key part of the deal China has been demanding: the same $1 billion floor on investments, currently applied to investments from the United States, South Korea and Japan, that would be reviewed by the Foreign Investment Review Board.

Crikey understands that this is still on the table for private companies — but here lies the rub. The biggest Chinese investors in Australia are state-owned enterprises — and only two years ago, then-opposition leader Tony Abbott announced, in Beijing, no less, that he was not in favor of allowing SOEs to own majority shares in any Australian companies. Since then, Treasurer Joe Hockey has allowed State Grid Corp of China, the world’s biggest state utility, to buy 19% of electricity supplier SP AusNet and 60% of energy infrastructure company SPI Australia. That’s some backflip.

There is a standard clause in FIRB rules that any state-owned company investment, irrespective of its size, needs review. But the Chinese are pushing hard to have at least a minimum amount introduced for SOEs as well. Palmer may well have given them more ammunition.

Following his visit to Australia, Xi and much of his delegation will head to New Zealand. Like many European countries, it has done a much better job of branding itself for the Chinese market and pulling in investment across a range of sectors.

Game on.

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August 26, 2014
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Democracy on China’s fringe riles Beijing

macauvote

Democracy groups running unofficial polls on the future of electoral reform in Hong Kong and Macau have the Chinese Communist Party up in arms but so far not armed. The Macau poll held on Sunday, August 24 was shut down by local authorities and four organisers arrested, Beijing called the vote “illegal and invalid”.

The Special Administrative Regions, former colonies of Britain and Portugal, elect a governing body with an odd franchise in both territories which allow for some directly elected members, some elected by “functional constituencies” such as the professions, business groups and community groups, and others appointed by the chief executive of the region.

The Legislative Council in Hong Kong and the Legislative Assembly in Macau govern their respective SAR, with Beijing responsible for defence and foreign affairs but not policing – though increasingly they are making their presence felt on the street.

Under the “one country, two systems” arrangement agreed between Britain and China, in Hong Kong universal suffrage will be allowed  at the next Legislative Council elections in 2017 and democrats are agitating for a directly elected leader of the government from a list of candidates chosen by the people, rather than Beijing.  But according to Standing Politburo Committee member Zhang Dejiang the white paper released by Beijing on the future of Hong Kong, one of the chief reasons for conflict, is not the end of reform –  and this could well go the other way than Britain had originally intended. The Chinese regime under Xi Jinping has given not the slightest hint it is interested in political reform.

The South China Morning Post has followed both processes closely, in the lead up to the referendum in Hong Kong in June and the results, such as this piece by Michael Chugani, Referendum versus white paper can only result in zero reform.

The BBC asked  Why did Hong Kong hold unofficial democracy referendum after it was widely reported almost 25% of Hong Kong citizens voted in the poll, which the New York Times  says bolsters the democracy movement.

This is certainly giving the Chinese Communist Party a taste of civil disobedience beyond its control, at least so far. An op-ed in today’s Global Times, an English language news service in Beijing, goes so far as to say “The opposition camp in Hong Kong embraces some unrealistic illusions that must be knocked out. A number of extremists must pay for their illegal confrontational behavior, which should serve as the basic logic for Hong Kong society. ”

This morning the SCMP reported:

Macau authorities have stepped up their crackdown on democracy activists operating an unofficial “referendum” on the upcoming chief executive election, placing a core leader under judicial investigation yesterday.

But the allegation that the poll organisers had breached personal data laws is in question, with a legal scholar saying it is “hard to justify” the detentions on those grounds.

The authorities’ latest move came after police shut down all five of the poll’s physical voting stations and detained then released four organisers within hours of the referendum’s launch on Sunday.

Jason Chao Teng-hei – leader of the Open Macau Society, which is organising the poll with Macau Conscience and Macau Youth Dynamics – was accused of failing to comply with a government order to stop the referendum. Chao said the order was illegal.

His case was transferred to the public prosecutions office, part of Macau’s judicial system, and he is required to make an application if he needs to leave Macau for longer than five days. Read more…

 

 

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