Iron ore price: China manufacturing crisis could see Australia in recession

When the global financial crisis broke out in 2008, there were concerns that Australia could plunge much of the rest of the developed world into recession. But like many times before and after, Australia’s luck favored her.

As fortunes fell on Australia itself, the nation became one of the precious few worldwide to survive a major recession and potential housing market crash.

The unprecedented Chinese stimulus saw more cement poured into the entire 20th century than the United States in two years, spurring commodity prices, coming to the aid of the economy and Treasury coffers at just the right time.

The price of iron ore rose more than 400 percent between December 2007 and February 2011.

Meanwhile, between February 2009 and February 2011, the price of coking coal, a major input in manufacturing steel, more than doubled in price.

Lucky Country had good fortunes and came to Australia’s aid at the right time, but the reward provided by China’s insatiable demand for bulk minerals was only the beginning.

At its peak in mid-2009 and early 2012, mining investment more than doubled as new mines were built, infrastructure was built and services were put in place. At that time it drastically increased wages in the mining sector and filtered through the rest of the economy in the form of higher consumer spending.

Amid the recent pandemic, history didn’t exactly repeat itself, but it certainly rhymes, as iron ore prices rose 151 percent between the end of 2019 and their peak in May 2021.

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While the aid provided by Chinese commodity demand did not provide the same duration and magnitude as in 2008, it was still a huge boon to the economy and the Treasury treasury.

But now that the Chinese economy is deteriorating due to a slowing global economy, Beijing’s COVID-zero strategy and China’s wealth sector woes, Australia’s boon to the end of the country’s long-lasting good fortune, among other factors. Take risks together. ,

China’s property sector dilemma

In the years following the global financial crisis, the Chinese government’s approach towards big property developers in trouble was generally to throw money at the problem until it went away. This is until about 18 months ago, from which time the Chinese government became more prudent about its interference in the property sector.

With the Chinese government now coming to the rescue much less frequently and dedicating only a tiny fraction of the resources needed to outright fix the region’s short-term financial issues, the property sector continues to deteriorate.

While some decline is expected due to the pandemic and China’s ongoing COVID-zero strategy, the volume of residential floors under construction has fallen by more than 39 percent compared to May last year.

The number of new housing projects under construction has also declined by over 41 per cent as compared to May last year.

According to an analysis by Bloomberg, the construction halt could impact homes worth 4.7 trillion yuan ($995 billion AUD) across China, requiring 1.3 trillion yuan ($A275 billion) to complete them.

Potentially potential homeowners who are currently paying off a mortgage on a property that has stalled construction are extremely disappointed with the situation. It is usually at this point that the Chinese government rushes to the rescue, bails out the developers and things proceed as usual.

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But that is not happening, so citizens affected by these construction halts have taken an equally unprecedented step towards China, simply refusing to pay their mortgages. According to estimates by analysts at Bloomberg, thousands of affected home buyers have refused to pay their loans.

Crowd sourced data concluded that the mortgage boycott is affecting more than 320 development projects across China.

On Monday, it was announced that the People’s Bank of China (the Chinese central bank) and the China Construction Bank will fund 300 billion yuan ($64 billion) to help developers and projects complete through potential commercial bank loans. will launch.

On paper it sounds like a fairly large commitment, but when put in the context of an industry that generates more than $7.6 trillion of China’s GDP, it’s a drop in a much larger ocean.

going forward

This brings us back to Lucky Country. It has been slowly dominating commodity markets in recent weeks that the expected massive Chinese manufacturing-driven stimulus program is not coming.

Since their most recent peak in early April, iron ore prices have fallen by more than 34 percent. It comes amid a 5.5 percent drop in global steel production in the first half of 2022, driven in large part by a decline in production in China.

Now the big question is, does Beijing offer a large spending construction-driven incentive program? Or a much larger and wider range of support measures for the property sector? If the answer to both of those questions is no and Beijing instead chooses to focus its resources on supporting families and businesses affected by the pandemic, demand for wholesale goods could remain weak.

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For more than a decade Lucky Country has feasted on the generosity provided by Chinese demand for Australian minerals, it has underpinned everything from state and federal budgets through the strength of our currency.

Once again Australia is staring at another global economic downturn and we get to see if the Lucky Country’s fortunes can be carried further.

Tarrick Brooker is a freelance journalist and social commentator. @AvidCommentator

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