I thought it interesting and significant that China joined the coordinated rate cut last night.
If China tips over, the numbers become really big.
The really key question IMO is how export dependent the Chinese economy is.
If it is more dependent than what people are letting on - which I believe it may be - then the next key variable is how prepared the Chinese Communist regime will be prepared to step in and internally fund the industrialisation so that they can ride out this current meltdown.
If either:
(a) Their economy is not export dependent; or, (b) It is and the Commuist regime is prepared to step in and continue funding the growth at eight or nine percent.
Then the only thing that may drive our markets lower is sentiment (ie, fear). Not an impossibility but less likely than if the Chinese economic bubble bursts.
Kloppers' read of cycles over long periods of time is very good IMO. He's given some excellent presentations and has an excellent understanding of the post war industrialisation.
Where I do see companies like UMC as being susceptible is on the demand side of the equation.
If demand scales back basic economics tells us that the first casualties will be the high cost operations and the smaller operations.
Why?
Chinese demand for IO will decrease which in turn will drive down the price of IO product.
I don't believe that will lead to the closure of large IO operations in Brazil anymore than it will in Australia: other than higher cost operations. Nor do I believe that it will weight their demand reliance over to Australia materially more than it already is.
Necessarily, supply in these countries will be shed by cutting down these higher cost operations and by cutting back on mine-gate sales agreements from juniors like UMC.
The challenge for the juniors will be in finding routes to market that don't price themselves out of the market, and this is where third party access pricing regime structures will become critical.
Two questions arise:
1. Whether viable IO juniors will entertain Chinese entry onto their registers; and, 2. If not, whether the Chinese will pay potentially higher offtake prices to keep these juniors in play during this period of downturn.
Just my thoughts.
BUSH
UMC Price at posting:
70.0¢ Sentiment: Hold Disclosure: Held
