Print David Uren, Economics correspondent | March 02, 2009 Article from: The Australian DOZENS of freighters carrying Australian iron ore are stalled outside Chinese ports amid a collapse in demand for steel, dashing hopes that Chinese industrial demand will protect Australia from the worst of the global recession.
Tumbling Chinese exports and renewed stock market lethargy indicate that efforts by Chinese leaders to defy the global economic crisis are struggling.
Instead of being used in new office buildings, factories and bridges, steel is being stockpiled, driving an 8.6 per cent fall in Chinese steel prices in the past fortnight.
The situation bodes ill for pivotal annual iron ore contract negotiations between Australia's big iron ore miners and China's steel mills.
The emerging weakness in China will weigh on the Reserve Bank board, which is meeting in Sydney tomorrow to consider a recommendation from the RBA management to halt its run of interest rate cuts.
Although Chinese authorities hope they can hold the decline in the country's growth rate to 8 per cent, the IMF is forecasting 6.5 per cent and private analysts are suggesting it could be considerably lower.
Kevin Rudd, the RBA and Treasury have clung to the hope that reasonable growth in China will limit reductions in Australian commodity exports and buoy economic activity.
Reserve Bank governor Glenn Stevens told a parliamentary committee 10 days ago there were early signs China's economy had reached a bottom, with industrial production levelling out. Last week, Treasury's chief economist David Gruen told the Senate that China's fiscal stimulus package would boost commodity markets, and suggested China's economy was already bringing stability to commodity prices.
Until two weeks ago, reports of rising Chinese steel production had lifted world steel prices by 15 per cent since the beginning of the year, while bulk freight shipping rates, seen as an indicator of world commodity demand, were rising as mining companies responded to fresh Chinese orders.
But Macquarie Bank commodity analyst Jim Lennon said ships laden with Australian iron ore were queueing outside China's ports, unable to unload, because of cutbacks by China's steel mills.
"The number of total ships at anchor has risen to 75 from 55 at the beginning of February and from 21 at the beginning of the year," he said.
"This strong increase in ships waiting to unload cargo is clearly a negative sign for the Chinese iron ore market."
Mr Lennon said iron ore freight rates between Australia and China had dropped by between 15 and 20 per cent in the past week.
Little more than 12 months ago, there were long queues of ships outside Australia's coal ports of Newcastle and Dalrymple Bay because the ports could not load them quickly enough.
Citigroup commodities analyst Alan Heap said China's stocks of steel had almost doubled since the beginning of the year as traders readied for the stimulus package.
However, demand has not yet eventuated as China's steel industry continues to grapple with falling exports and the bursting of a property construction boom.
Mr Heap said China's steel production and iron ore demand were set to fall in coming months.
The change in assessment of China's growth outlook is not confined to the iron ore market. China's share market had been the strongest performer worldwide this year, rising 30 per cent since January, but it has reversed direction over the past two weeks, with the Shanghai Composite Index falling 7.9 per cent last week.
Companies that stand to gain from the stimulus package suffered the biggest drops, with the major investor in Rio Tinto, Chinalco, falling on Friday by the maximum limit of 10 per cent.
There is speculation that China's National People's Congress, which starts on Thursday, may be used as a vehicle to announce the doubling of the stimulus package, which is already equivalent to $920 billion.
Standard Chartered's chief China analyst, Stephen Green, said this would be a boost to confidence and improve the chance of meeting the Government's GDP growth target of 8per cent. He said delays in getting projects approved meant it would be hard to assess the effect of China's stimulus spending for the next few months.
It is expected that when China's economy turns, it will rise as fast as it has fallen.
The evidence of renewed weakness in China's economy will complicate the Reserve Bank board's deliberations at tomorrow's meeting.
The Reserve Bank management is understood to have recommended a pause in the run of rate cuts, which, over the course of five meetings, have brought the official interest rate down by 400 basis points, to 3.25 per cent.
However, the bank's board has twice in the past six months cut rates by more than the bank's management recommended because of news emerging between the board papers going out and the actual meeting.
In addition to China's faltering recovery, evidence is mounting that the world economic slowdown that hit in the final three months of last year is continuing into the new year.
Business surveys in Europe and Japan indicate conditions have worsened in the past two months. In the US, the number of jobless is rising while manufacturing orders drop. On Friday, the US revised its estimate of GDP in the December quarter, showing it had fallen 1.6 per cent, or an annual rate of 6.2 per cent.
Across Asia, economies are weakening as exports tumble, with Japan reporting on Friday a 10 per cent fall in industrial production.
JP Morgan chief economist Bruce Kasman told The Wall Street Journal it was a mistake to think that China could carry the rest of the world on its shoulders.
"A sustained recovery in China is dependent on better news globally," Mr Kasman said.
JP Morgan estimates that world GDP contracted at an annual rate of 6.5 per cent in the December quarter.
The new build-up of stocks at the Chinese steel mills comes at a bad time for Australia's big iron ore miners, BHP-Billiton and Rio Tinto, which are in their annual contract negotiations
