The slowdown in the Chinese economy seems to be deepening with the surprisingly sharp slowdown in industrial production, retail sales and investment revealed in the monthly economic data for April now followed by growing reports of some Chinese buyers either deferring or defaulting on cargoes of thermal coal and iron ore in particular. It’s not that China is seeing a plunge in activity, it seems there’s a shortage of US dollars and a drop in demand for key materials such as steel and other metals, which is leading to rising stocks of raw materials, such as iron ore, copper, tin and aluminium.

These reports come as the likes of BHP Billiton and Rio Tinto have confirmed they are cutting back on ambitious expansion plans, but still pursuing their rapid growth plans for their iron ore mines in Western Australia. The share prices of BHP and Rio Tinto fell sharply in last week’s sell-off as investor concern about China grew. Those fears were overshadowed by the eurozone crisis.

The reports have been given credence by appearing on the Asian website of the Financial Times this morning. And questions about the health of the Chinese economy were also underlined by the prominence given on official Chinese websites to comments about economic growth by Premier Wen Jiabao who talked about “maintaining growth”.

“Premier Wen Jiabao urged more efforts to maintain relatively fast economic growth as the world’s second-largest economy has shown signs of further slowing,” Xinhua reported at the weekend.

“The country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations,” Wen said during an inspection tour to Wuhan, capital city of central China’s Hubei province, from Friday to Sunday. “We should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth,” Wen said.

The Financial Times said that an unknown number of buyers of thermal coal and iron ore were “asking traders to defer cargoes and — in some cases — defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets.

“The deferrals and defaults have only emerged in the last few days, traders said, and have contributed to a drop in iron ore and coal prices. We have some clients in China asking us this week to defer volumes,” said a senior executive with a global commodities trading house, who warned that consumers were cautious. “China is hand to mouth at the moment.

“A senior executive at another large trading house also confirmed there had been defaults and deferrals in both thermal coal and iron ore.” The sellers were not identified in the report.

Iron ore prices are now approaching $US135 a tonne (landed in northern Chinese ports from Australia), down from $US150 a tonne six or seven weeks ago. Iron ore prices have fallen 9% so far in May. Thermal coal prices fell to $US97 a tonne in Newcastle last week, the first time they have fallen under $US100 a tonne for well over a year. Coal prices are being driven lower by US coal companies dumping unsold stocks into the Atlantic Basin and Pacific Basin markets because of the warm winter and spring has cut power consumption. At the same time record-low prices for natural gas has seen US power companies boost their use of gas (especially shale gas), which in turn has pushed more thermal coal onto world markets and driven prices lower. Spot prices are now about 10% under 2012-13 contract prices signed earlier this year by companies such as Xstrata and other Australian exporters

Chinese industrial production eased to an annual 9.3% growth rate in April, down from 11.9% in March, electricity consumption and production were noticeably slower, car sales remain weak, retail sales eased to their lowest annual growth rate in nearly a year and urban investment activity fell to a decade low annual rate in April as well. Crude steel production eased from March, but remains above a year ago, but production of other metals such as copper and tin fell in April, with imports also down.

While the Chinese economy grew at an annual 8.1% rate in the March quarter (which was up 1.8% from the December, 2011 quarter), some Western analysts now say growth appears to be slowing towards the 2012 annual target of 7.5% rate in the current quarter. Most analysts see the economy recovering in the final two quarters of the year, but some are starting to wonder. The sharp contraction in liquidity promoted the easing on the reserve ratio for banks, freeing up close to $US70 billion for lending to cash strapped companies or banks (whose lending has slowed sharply, according to reports last week) to lend money into the local short-term market.

Some reports suggest there’s a shortage of US dollars in China because of the slowdown in trade, especially export and the liquidity squeeze in the domestic economy that is aimed at slowing property prices and inflation. Some reports say the deferments and defaults now emerging, are linked to buyers not having enough US dollars to pay for their purchases.

The Financial Times said that some buyers of soybeans, another major import, have defaulted or deferred payments in the past couple of weeks.

Peter Fray

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