–Clyde Russell is a Reuters market analyst. The views
expressed are his own.–
By Clyde Russell
LAUNCESTON, Australia, Oct 18 (Reuters) – It’s probably not
going to be too hard to find bearish analysis of China’s
economic growth data, but much of this will miss the point.
While the 7.4 percent expansion in gross domestic product in
the third quarter from a year earlier was lowest since the first
quarter of 2009, all this tells us is what we already knew.
The Chinese economy has slowed more than had been hoped for
by the rest of the world and by more than the authorities would
have wanted.
But it’s also important to point out that a 7.4 percent GDP
outcome is far from a collapse, and still not quite the proof of
a hard landing that many fear.
It’s also not an outcome that supports the doom and gloom
that has crept into much of the commentary about commodity
demand from the world’s biggest buyer.
The easing in China’s growth certainly justified some of the
pullback in prices for iron ore, coal and some other
commodities, but maybe not to the extent that happened.
For example the price action in spot iron ore , which declined 22 percent in the third quarter,
would seem to suggest that the outlook now is worse than it was
in the aftermath of the 2008 global financial crisis and
recession.
While iron ore has recovered in recent weeks to trade around
$115 a tonne, it’s worth noting that the price since around the
beginning of August has been hovering around three-year lows.
So, are things in China as bad now as they were in the
aftermath of the 2008 crisis, and is the outlook for recovery
worse?
Even though the September quarter GDP numbers are largely an
exercise in understanding what is now history, they do provide
some interesting perspectives.
GDP growth fell steeply in China from 10.8 percent in the
second quarter of 2008 to 6.6 percent in the first quarter of
2009.
It then rebounded rapidly to 12.1 percent by the first
quarter of 2010, after which the slide to the current level has
been more gentle.
It may be the case that GDP will slip further in the fourth
quarter as it’s likely the government’s stimulus programme will
take time to work through the economy.
Assuming the stimulus works, GDP growth should once again
start rising by the first quarter of 2013 at the latest, but
this time the rebound is likely to less pronounced than in 2009,
as the spending measures are smaller and the decline in growth
wasn’t as bad in the first place.
And there are some tentative signs that the Chinese economy
was bottoming out in the third quarter.
Industrial production, retail sales and fixed-asset
investment all accelerated, and beat consensus forecasts to
boot.
Industrial output was up 9.2 percent, beating August’s 8.9
percent and the forecast for 9.0 percent growth, while retail
sales grew 14.2 percent, up from August’s 13.2 percent.
January to September fixed-asset investment rose 20.5
percent, beating the 20.2 percent consensus, which was the same
as achieved in the year to August.
So, where does this place the outlook for commodity demand
in China?
Is the scenario sketched by big miners like BHP Billiton and
Rio Tinto of a gradual recovery in demand growth more likely
than the alternative of extended ongoing weakness?
Both BHP, the world’s biggest mining company, and Rio, the
world’s number two iron ore producer, reported September quarter
production figures this week that were probably most noteworthy
for showing steady to moderately higher output.
In other words, there was nothing in the production reports
that spoke to a dramatic drop in demand, or even a looming
slump.
Obviously BHP and Rio will suffer revenue losses given the
decline in prices for iron ore, copper and coal during the
quarter.
While the decline in prices prompted both BHP and Rio, and
other resource companies, to shelve some projects, delay others
and cut costs by trimming jobs, in general the mining bosses
have maintained upbeat longer-term assessments.
“Markets remain volatile, but our business is resilient and
our operations are performing strongly,” Rio Chief Executive Tom
Albanese said in Tuesday’s quarterly activities report.
His BHP counterpart, Marius Kloppers, said he expects
China’s growth rate to stabilise around 7-8 percent over the
next 10 years, still enough to boost demand for iron ore by 650
million tonnes this decade, down from 850 million tonnes in the
prior 10 years.
The “demand shock” that drove commodity prices last decade
is over and the price boom is over, Kloppers said in notes for
speech on Wednesday in Brisbane.
This means the focus is on costs and capacity, he said.
In effect, what Kloppers and other mining executives appear
to be saying is that the company with the lowest costs is going
to be the winner, and that investors and traders are going to
have to learn to live in an environment where prices don’t rise
(and presumably fall) as rapidly as they have in recent years.
This is pointing to a more “steady as she goes” world for
Chinese commodity demand growth and the performance of the
resource companies geared to supplying that demand.
