China: More Red Flags.

Apart for being the monopoly supplier of rare earths and metals to the global economy, China is now the marginal economy that keeps the western economies healthy or sick. Yes I know that Europe seemingly has a death wish all of its own making, and its politicians are dithering dolts incapable of facing up to the reality of a failing currency union, but its global trade with China that’s become or becoming what is really important in the current level of world trade, and there are worrying signs that all is not well in China. If China is seriously slowing, that could have big consequences in our REE sector.

But first more red flags in China. China’s numbers don’t add up to a thriving economy, plus China now seems to have a glut of iron ore.

China’s very mysterious data
By Ambrose Evans-Pritchard  Last updated: January 26th, 2012
A quick observation.

I could not help noticing that China’s imports from Japan fell 16.2pc in December. Imports from Taiwan fell 6.2pc.

The Shanghai Container Freight Index fell 1.4pc to a record low of 919.44 in November, after sliding relentlessly for several months. It has picked up slightly since.

The Baltic Dry Index measuring freight rates for ores, grains, and bulk goods, has fallen 44pc over the last year. Kasper Moller from Maersk in Beijing said weak Chinese demand for iron ore was the key culprit.

Cautionary warning. The BDI index also reflects the shipping glut, so it is not a pure indicator.

However, rail, road, river and air freight volume for the whole of China fell to 31780m tons in November (latest data), from 32340m tons in October. Not a big fall, but still negative. (National Bureau of Statistics of China.)

Chinese electricity use was flat in over the Autumn, with a sharp fall in the (year-on-year) growth rates from 8.9pc in September, to 8pc in October, and 7.7pc in December.

Residential investment has been contracting on a monthly basis, and of course property prices are now falling in all but two of China’s 70 largest cities.

So how did China pull off an economic growth rate of 8.9pc in the fourth quarter?

Beats me.

I strongly suspect that the trade and power data reveal the true state of China’s economy.

There clearly was a pick up in early January but I stick to my view that China has inflated its credit bubble beyond the limits of safety – an increase of 100pc of GDP in five years, or twice US credit growth from 2002-2007 – and that Beijing cannot continue to gain much traction with this sort of artificial stimulus.

Indeed, the extra boost to GDP from each extra yuan of credit has collapsed, according to Fitch Ratings.
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With China shut, Vale iron-ore ships head to Philippines
26th January 2012
SINGAPORE - Two of the world's biggest iron ore carriers are due to arrive in the Philippines for the first time next month, shipping data showed, as Brazilian mining giant Vale looks to use the country as an alternative base to reach Chinese ports.

China, the world's largest iron ore importer and Vale's top market, has yet to fully open its seaports to the giant vessels after domestic ship owners strongly protested the arrival of the first and only vessel of the type into the country in late December.

With accessibility to Chinese ports uncertain, Vale has been forced to rely on its transshipment hub in the Philippines, a costlier alternative that involves employing more vessels and workers.

"I'm not surprised that Vale is sending its ships to the Philippines. They have no choice with China's ports still closed off to them," said a Singapore-based ship broker.

"They have to keep these ships moving or face major losses."

The 400 000-deadweight-tonne Vale China is due to arrive in Subic Bay Freeport, located in the Philippines' main Luzon island, on Feb. 22, shipping data showed.

That is 10 days after similar-sized Vale Brasil is expected to dock.

Draught measurements indicated the two ships were fully loaded, each likely carrying around 350,000 tonnes of iron ore, traders said.

At current iron ore prices, the value of each cargo is nearly $50 million.
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If China is slowing will China hoard its REEs in stockpiles for future use, or dump them into a world market that is already slowing itself? I’m tempted to think that with FX reserves of over 3 trillion, China would hoard rather than distress sell. But second guessing China isn’t so easy.  Short term investors in the REE sector might be in for a difficult few weeks. Long term investors are in the sector for the post 2015 boom. We will have to keep watching China like a hawk. Opinions anyone?