3 weeks old but David Uren not so worried. See link to read full (longish) article.
Rise in commodity prices welcome, but will it last?
- The Australian
- 12:00AM September 19, 2016
Economics Editor
Canberra
Commodity markets are delivering a surprise boost to national income and better results coming from the Chinese economy suggest it may continue.
The spectacular surge in spot coking coal prices from $US90 a tonne to $US200 a tonne in the space of the last two weeks is a reminder that China’s steel industry has inelastic demand — the mills will pay whatever it takes to secure their supplies.
There are quirks in the coal market — a mining problem at South 32’s Illawarra operations and some maintenance issues at Queensland mines have disrupted Australian supply while China’s authorities have imposed production cuts on their own mines, which have also suffered from heavy rains.
Coking coal prices will return to earth as some of these supply issues are resolved, but even before the squeeze of the last two weeks, they had risen by around 30 per cent this year while steaming coal had enjoyed a similar increase.
Iron ore prices have risen from around $US40 a tonne at the beginning of the year to $US55, having risen above $US60. Most analysts expected the mid-year boost to iron ore prices would be short-lived because significant new iron ore supplies were coming on-stream.
However, prices have remained firm as China’s economy shows greater momentum following the stimulus of greater bank financing and fiscal expansion. China’s steel production rose 1.3 per cent in the June quarter, reaching its highest level in two years and responding to demand growth in the real-estate sector, while exports were up by 11 per cent.
The stimulus is supporting the Chinese economy more broadly. Figures out last week showed industrial production grew 6.3 per cent in the year to August, the fastest pace since March, while retail and motor vehicle sales were also ahead of expectations. The latest run of manufacturing surveys have been showing steady improvement and economists now expect the economy overall will meet or surpass the government’s target of 6.7 per cent growth this year.
The turn in commodity prices is not boosting all markets. Copper, often seen as the best indicator of industrial health, is languishing, while LNG prices have been sliding for the past two years, dropping by two-thirds.
However, zinc, nickel, aluminium and oil are all well ahead of the low points reached earlier this year. Westpac senior economist Justin Smirk says there may be an element of financial demand supporting prices. Chinese investors have often sought commodities as a surrogate for US dollars. More broadly, holding commodities becomes more attractive in a world of negative or zero interest rates on bonds.
However, demand, particularly in China, has also been stronger than expected. World markets have spent the past four years marking down China’s growth. Even putting aside the gloomier predictions of a Chinese recession which some, including Citigroup, have been making, all the major forecasters expect the slowing of growth to continue as the economy shifts from export and investment-led growth to greater dependence on household consumption.
If China is instead showing resilience, with the problems affecting the state-owned heavy industry effectively partitioned from the rest of the economy, commodity prices may show further gains. Former Morgan Stanley chief economist Stephen Roach, who is among those arguing the China downturn story has been oversold, says that if China meets its 6.7 per cent growth target, it will account for 1.2 percentage points of global GDP growth, or roughly 40 per cent of the total.
The lift in commodity prices in the June quarter translated into the first improvement in Australia’s terms of trade (export prices relative to import prices) since the end of 2013. Economists expect another improvement in the current quarter, and possibly the December quarter as well.
This is a big change — export prices had been falling fast for most of the past five years, since the resources boom peaked in 2011....
http://www.theaustralian.com.au/bus...t/news-story/cf31193baf52e7febc5281bf403002f9
(20min delay)
