China Bubble – Soft Landing My arse: Crash alert No 2

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I wrote HERE about a month ago that China would not see a soft landing but that because there were such pronounced bubbles within its economy it would suffer a pretty hard landing indeed during 2012.  Some folks pooh-poohed the piece arguing about demographics, work ethic, the ability of the central bank to cushion the blow, blah blah blah. Well today comes a little more evidence – if you needed it – that I am anything but wrong.

Just for the record anyone who thinks that an economy that sees whole cities build merely to satisfy speculative demand and streets of office block constructed for the same reason in the full knowledge that none of these properties will be used, is crackers. They really do need to read up on bubbles. It will NOT be different this time!

In the last piece I cited stacks of stats on how the real Chinese economy was slowing very rapidly indeed. It is that sort of data you need to watch not the lies, dammed lies and unbelievable statistics pumped out by the Chinese state. Today I bring you a quick report from Platts:

Several Chinese steel mills have plans to reduce their spot iron ore import volumes and maintain lower inventory levels, as steel demand remained lacklustre and losses plagued end-users, several mill sources said.

Iron ore is the primary raw material used in steelmaking for blast furnace operators.

“We’re planning to cut spot iron ore imports by about one to two Capesize vessels, or about 300,000-350,000 mt, a month,” a source at a major Beijing-based steel mill said.

He added that they were keeping about a month’s worth of iron ore stock now, down from the 1.5-2 months’ they usually have. But if the market continued worsening, the mill is prepared to cut inventory levels to two weeks. A Hebei-based steel mill that purchases iron ore completely from the spot market said they had plans to reduce import levels, but would not comment on the specific volume that would be cut or when this cut might take place.

Another steel mill based in the province of Hunan laid idle an 1,080 cubic meter blast furnace early last month and was planning to restart the furnace July 21.

“As China construction activities slow down, it is difficult to move our steel products to the buyers. In fact we have been producing at 80% capacity since April,” said a source from the mill.

The source also added that they were now mulling whether a production cut to minimize losses or pushing up production to full capacity to enhance cash flow was the right strategy to adopt.

“Steel fundamentals remain weak in the short run, and our focus now is not to make profits but to minimize losses,” said the mill source.

A Singapore-based trader said the second quarter earnings reports of Chinese mills showed a very poor performance and with most making losses, it was not surprising that buying interest was low.

Back to me. So in summary here are the bare facts: most Chinese steel mills are now loss making. Inventory levels are being cut by 33% to 66%. And folks seem to think things are getting worse. That is no soft landing my friends, this is a very hard landing indeed.  What does this mean?

a) Expect the PRC to join the Quantitative Easing game in a big way. So we will then see QE in China, the US and in the Eurozone (including Britain) on a mammoth scale over the next year. You know what that means in due course: inflation, the destruction of the value of fiat currencies and a bull market for gold.

b) base metals prices are heading sharply south this summer. I would be wary of any play in this sector. Explorers will find it hard to raise cash, producers will be thinking about mothballing mines etc.

c) Any China based stocks/funds in your portfolio need to be looked at carefully. Are huge cuts in earnings forecasts discounted already? If not, they soon will be. For what it is worth I am not sure I believe the earnings numbers cited by many Chinese companies anyway and would so heavily risk them accordingly that I am happy having no Chinese exposure in my portfolio. Gioven what is about to happen I cannot see any even vaguely compelling reason at all to own any China based investment. The PRC is a short to medium term conviction sell.



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  1. Tom Winnifrith says:


    You raise very valid concerns. I have another one which will be my China 3 piece tomorrow when I am on a proper PC not one which keeps tripping out as I sail across the Aegean in a rather unlovely ferry.

    Timing is always hard but it strikes me that the economic news coming out of the PRC is very bad indeed. I shall have a stab at timing tomorriow but if I owned a half built oreven finished condo in a ghost City I would be pretty sh*t scared by now

    Thanks for a very constructive post and for your feedback.

    Tom Winnifrith

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