Check this article from AFR, Chinese economist predicting shareholders in these highly leveraged miners will lose everything – in the end, creditors will take over these projects and also forecasting iron ore price to $US60 a tonne from $US150 a tonne.
Will Glasgow and Ayesha de Kretser
Renowned China bear Andy Xie has claimed that investors in debt-laden Australian iron ore miners risk big losses and forecasts that prices for the commodity will drop below $US60 a tonne from $US150 a tonne.
The dire prediction comes after China signalled on the weekend it would curb investment in its property sector, which has potentially significant consequences for steel demand.
Big iron ore miners fell sharply in trading on the Australian Securities Exchange on Monday: Rio Tinto suffered its biggest one-day fall in percentage terms since August 30 and Fortescue lost 3 per cent. Investors interpreted the tightening of controls on property and credit as signalling that the new Chinese leadership will adopt a much more prudent approach to managing investment in the world’s second-biggest economy.
On Friday, iron ore prices fell for the seventh straight day, down $US1.10 a tonne to $US150.60, according to The Steel Index.
Fortescue Metals Group has the greatest debt burden of its iron peers and has recently increased loans to fund expansion.
“I think a lot of shareholders in these highly leveraged miners will lose everything – in the end, creditors will take over these projects,” Mr?Xie told The Australian Financial Review on Monday.
He said China’s new property investment limits could put at risk earnings for Australia’s big iron ore miners. He said the iron ore price would fall below $US60 a tonne before it settled at an average around $US80 a tonne in the long run. ‘It could go to 50-something’
“I think it could go to 50-something .?.?. you need it to go low enough to convince [higher-cost] Chinese producers to abandon production.”
Shanghai-based Mr Xie, who was Morgan Stanley’s chief Asia economist, said strict controls were necessary to curb China’s overheated property sector. “So much money has been poured into the property sector,” he said. “But the banks are rolling over the old loans so you have all these empty buildings but not many people going bankrupt.”
“I think the Chinese leaders are concerned.”
Shanghai-based Macquarie analyst Graeme Train said the measures include the installation of a capital gains tax, boosting the cost of mortgages for second-time buyers to 10?per cent to 15 per cent higher than the benchmark mortgage rate and also increasing the size of deposits for multiple home owners.
These restrictions are expected to further slow Chinese steel production growth and, in turn, curb demand for iron ore.
Although Chinese steel production growth has been slashed to a quarter of what it was in 2007 before the global financial crisis hit, Australian miners still expect China to lift production of steel by about 4 per cent this year. Rio Tinto economist warns of tough end to 2013
Rio Tinto chief economist Vivek Tulpule told analysts in Sydney that China would grow strongly in the first half of 2013 as banks lent more money but the rate of expansion would fall as inflation resurfaced in the second half. “A sharp increase in bank credit and banker’s acceptances is supporting the current pick-up,” Mr Tulpule said.
He warned the second half could be tougher as inflation risks, particularly in property markets, resurfaced, pushing iron ore prices back to about $US100 a tonne. “Inflation is benign but residential housing costs are a leading indicator of a pick-up in consumer price indices,” he said.
Credit Suisse analyst Paul McTaggart said there was little mention by Mr Tulpule of how the controls on property would affect iron ore and steel demand. “I think it’s too new to have been in his presentation today but obviously it’s spooked the market,” Mr McTaggart said.
“A lot of it will be sabre rattling by the Chinese government and everyone will panic but I think there’s been a view that iron ore prices will come back over the second half anyway.”
As recently as November, Mr Tulpule predicted China could soon loosen controls on the property sector, boosting steel demand.
But for the first time China has reduced social housing targets for completion and starting in 2013. Starts will fall to 6.3 million from 7.8?million in 2012 and completions to just 4.7 million from 6 million.
China has historically offset concerns about the effect of slower growth in real estate on steel and iron ore by putting more money into social housing.
“One of the potential messages that this move on social housing sends is that China is going to be happier with much lower levels of growth,” Macquarie’s Mr Train said.
Rio and BHP Billiton have based their expansion plans in iron ore on a belief that Chinese steel production will hit more than 1 billion tonnes at its peak by 2030. But Mr Xie warned that consumption of steel had peaked at 700?million tonnes, saying investment in rail and motor vehicles would not offset fixed asset investment in highways and property.
“How could that justify a big boom in steel demand?” he asked. “This view that China will keep growing because China’s per capita stock of steel is still much lower than in the US – this is totally wrong. Chinese people are squeezed together in big cities. So the per capita stock of steel will be much more like Japan than the US.”
