Australia Country Report 2014

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Discovery Reports

Mining still solid despite slowdown

PUBLISHED : Monday, 10 March, 2014, 3:57pm
UPDATED : Wednesday, 10 June, 2015, 3:56pm

The slowdown in Chinese growth - to a still-impressive and better-than-expected 7.7 per cent - has certainly hurt Australia's economy. The country expanded its mining capacity as Chinese growth rocketed. Now, as China's expansion slows, global commodity prices have fallen and Australia's economy is growing at a slower pace as mining investment crumples.

But that doesn't mean that Australian exports to China have fallen, according to news reports. China's economy is much larger than it was just a few years ago, and it continues to require massive amounts of commodities for its infrastructure projects and to build houses. China's biggest iron ore investor in Australia, Citic Pacific, says it expects Chinese steel production to remain in the range of 700 million to 800 million tonnes a year for the next few years.

Fiducian Group funds manager Conrad Burge is still positive about the outlook for Chinese demand for Australia's resource exports. "China's economy is still expected to grow above 7 per cent," he told the Sydney Morning Herald. "Many analysts have forecast plans to shift the economy from being infrastructure-led to consumer services-led will mean less demand for iron ore and coal. But we expect China to have strong demand for Australia's commodities for some time even."

Amid the dire predictions, Australia posted an A$468 million (HK$3.25 billion) trade surplus for December. That built on a surplus in November of A$83 million, the first trade surplus in two years.

Analysts have warned that China's appetite for imported ore would wane in the months ahead as industrial growth cools and the demand for steel weakens. But the value of exports rose 4 per cent on-month in December, thanks to solid gains in the sale of coal and iron ore, largely to China.

China's demand for commodities is still increasing, albeit at a slower pace. The country's iron ore imports hit a record in November, up a fifth from the start of last year. And Australian producers also have benefited from a weaker Australian dollar, which has fallen as much as 15 per cent from its peak last year, boosting export values in local currency terms.

Nev Power, chief executive of Fortescue Minerals, says recent Chinese economic data is quite strong and the demand for Australian iron ore will remain solid. "I think we've got to be careful not to react to 0.1 per cent changes in the manufacturing index or the PMI or GDP," he says. "The big picture is it's continuing to grow very strongly, and whether it's 7.6 or 7.7 [per cent], it's very strong GDP growth."

However, BlueScope Steel (BSL), Australia's biggest steelmaker with 32 offices on the mainland, says demand for industrial buildings and construction products is slumping in the world's second-largest economy.

"We didn't expect the Chinese slowdown to be quite as dramatic," CEO Paul O'Malley told Bloomberg News. "In building activity, in our space in particular, we are seeing negative growth at the moment."

Exports to China, Australia's largest trading partner, totalled a record A$95 billion last year, up sharply from A$73 billion in 2012. China took almost 40 per cent of Australia's goods exports in December and supplied 18 per cent of its imports, according to available statistics.

As more Australian mining projects near completion and begin production, the export volumes are likely to rise, analysts say. Still, the export surge will only go part of the way towards offsetting the mining investment drop in the medium term, economists warn.

Resources investment peaked at abound 8 per cent of GDP last year and is expected to fall by around 3 percentage points over the next 30 months, according to forecasts by the Reserve Bank of Australia.

"I think as long as China is holding up OK, the overall demand for Australian commodities will still do alright," Kieran Davies, Barclays' chief economist for Australia, told the Sydney Morning Herald.