Andy Xie: Caution in China a Blow to Miners

Andy Xie, renowned Chinese economist, shared his insights on Australian iron ore market in an interview done by Will Glasgow and Ayesha de Kretser for The Australian Financial Review. Andy forecasts that prices for the iron ore commodity will drop from $US150 a tonne to below $US60 a tonne, and that is because of China’s plan to curb investment in its property sector – fact that will influence China’s steel demand.

Andy Xie.  Photo: Luis Ascui
Andy Xie
Photo: Luis Ascui

Big iron ore miners fell sharply in trading on the Australian Securities Exchange on 25th of February 2013 and the iron ore prices continued to fell on 1st of March, for the seventh straight day. 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. […]

China’s new property investment limits could put at risk earnings for Australia’s big iron ore miners. Andy said the iron ore price would fall.

I think it could go to 50-something . . . you need it to go low enough to convince [higher-cost] Chinese producers to abandon production.[…]

Strict controls were necessary to curb China’s overheated property sector.

So much money has been poured into the property sector, 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. […]

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 Andy warned that consumption of steel had peaked at 700 million tonnes.

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.

Read the full article at The Australian Financial Review.

Dr Andy Xie 謝國忠 is Shanghai-based independent economist specialising in China and Asia. He is currently director of Rosetta Stone Advisors and of China Boqi Environmental Science and Technology.  He is also a guest columnist for the South China Morning Post and New Century Weekly.

Dr Xie is one of the few economists who has accurately predicted economic bubbles including the 1997 Asian Financial Crisis and the more recent subprime meltdown in the United States. He joined Morgan Stanley in 1997 and was Managing Director and Head of the firm’s Asia/Pacific economics team until 2006. Prior to that he spent two years with Macquarie Bank in Singapore, where he was an associate director in corporate finance. He also spent five years as an economist with the World Bank.

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