china cut back, page-27

Further to your questions/ comments, and to those of Dacata, etc.:

It is important to distinguish the comments IMO of US-based analysts giving a broad macro-economic perspective and try to drive down and understand what the implications of this thing will be here for us investing here in Australia.

When you compare the impact of major market crashes over the last eighty or so years, the size of those crashes and their impacts varied markedly between countries (eg, Australia v UK v US).

Western Australia, and Australia are far more heavily weighted to China commodity exports than most other countries in the world.

In the present case, I don't think there is any dispute that the long term China picture remains in tact: ie, growing middle class, urbanisation, growing steel demand and long-term commodities demand, etc.

The question is, IMO: what of the short to medium term, and how is UMC placed to weather it, and what of its production plans?

IMO, (all of this could well be wrong):

There will be a sizeable demand shift for iron ore from China in the short to medium term.

Why? Recession in Europe and North America will lead to a drop in demand for exports (as appears to be happening already), which will leave less cash to fund the building of major infrastructure and drive the real estate boom that the AFR article talks of.

In addition, there will be a short to medium term squeeze on foreign capital flowing into the country as a result of current events - predicting the impact of this is difficult - which will further impact real estate and infrastructure projects.

However, the Chinese central Government will draw on their massive FX reserves to try and protect growth: as much to protect political stability and prevent social unrest as anything else.

The question then becomes: what if demand for IO drops?

This is the tricky one for UMC, and one that has me trying to work out what to do when things bottom.

The hardest part for UMC is its limited cash position: around about $10 to $12M if my memory serves me correct.

If it's a short downturn, then UMC will obviously be fine. If it's not, then things can get problematic.

Conserving cash will be key.

Here, I tend to differ from the school of thought that the only route for UMC now is via the majors.

Perhaps paradoxically, it may even be the other way, depending on their cost structure, preparedness to take on a foreign partner, willingness to see substantial dilution, negotiate TP access, etc. etc.

Times like this, in many ways are a boon for the majors. It kills the competition that had been starting to build for them.

They've got massive production capacity online already in the Pilbara, and its' the same in Brazil.

The last thing that these guys will want to do IMO is take on the production or ore of smaller players and create a sniff of competition.

To cut back on supply to meet falling demand, they will, IMO, put a halt on doing any deals with smaller third parties and put the breaks on ramp-up projects if necessary.

Some tricky questions ATM are:

1. Predicting the length that this downturn will last;
2. Whether we have further unwinding of debt to come: potentially even into China and the Gulf States; particularly places such as Dubai (and the fire storm that this could create);
3. Whether UMC will have sufficient cash to ride it all out.

I want to put some more cash into UMC when there is clarity as to the bottom, but first, I want clarity on answers to the above questions.

BUSH