Why China is suddenly looking wobbly: Gottliebsen

Fasten your safety belts for a rugged China ride in the next few months. Australia’s biggest trading partner is being hit by too many blows at once and so will be unpredictable for the remainder of the calendar year.

That means that resource products ranging from base metals to oil, coal and iron ore could have a much tougher time in the remainder of 2009 than we saw in the last three months. That will put both the Australian dollar and the Australian share market under pressure.

The Australian share market faces extra pressures with disappointing surprises such as ANZ’s $300 million provision forecast by Melbourne Herald Sun banking writer George Lekakis.

Yesterday, I linked five dramatic events in China which were creating a new resources frontier: the arrest of four men in the Rio Tinto iron ore sales team; the events in the key resources province, Xinjiang; Chinalco’s call for more China minerals acquisitions; the setting up of a large fund to buy into junior miners; and the plan by China to use its stockpiles to lower mineral prices.

Overnight we have seen the forces created by those five events go further. It was an enormous decision for China’s President Hu Jintao to leave the G8 early because of the crisis in Xinjiang. What we are looking at in Xinjiang is a threat to the grand China plan. It is going to be crushed, with enormous force if necessary. President Hu Jintao could not afford to be in Italy for long given that his nation is at stake.

And when the existence of a nation is at stake tolerance for other events fades. We can now see how important that Rio Tinto deal was to China’s plan to control the global resources supply chain. The Chinese knew they were getting effective control of Rio Tinto and that a simple minority interest was simply not what they were after – hence the 600 pages of side deals to stitch up Rio control.

Rio Tinto actions in backing down threw the plan into disarray and the feelings ran very deep. It is going to take decades to build up rival suppliers. So when Rio Tinto took a hard line in the iron ore negotiations, the fuse blew, just as it will in Xinjiang if the unrest continues.

Against this background, according to the Mineweb newsletter, Deutsche Bank strategists Joel Crane and Xiao Fu warn that the base metals momentum evident in the June quarter will stall and move into reverse during the second half of 2009.

“Heading into 2010, we believe the metals complex will be hindered by a slow recovery in the industrialised economies and as it searches for a recovery in Chinese GDP growth, which we expect to take hold from the second quarter of 2010,” the Deutsche strategists say.

“Combined with our expectations of slower Chinese growth in the first three quarters of 2010, we do not expect industrial metals prices to top the peaks achieved in the June 2009 quarter until the December quarter in 2010.”

Nevertheless, the strategists were more upbeat for long-term industrial metals prices. “From 2011 we have a more positive longer-term outlook. A lack of investment and capital expenditure in the resource sector post the credit crunch, combined with strong demand from emerging market countries, makes for a strong structural story.”

I would add to the Deutsche forecast the impact of huge iron ore stockpiles, the weakening in the demand for oil and reports that China is not accepting some coal shipments. Predictions for the share market can go very wrong, but we have all the ingredients for a correction in the resources market which would lower the Australian dollar and the Australian share market.

This article first appeared on Business Spectator