Thursday, 26 February 2009

Wheels coming off the PRC

Some of the headlines and stories from one of the most despicable and totalitarian regimes on the planet our esteemed trading partner:

Production of China's home appliance industry shrunk in the second half of 2008 as export demand fell, the Ministry of Industry and Information Technology said (1). The figures still show growth for the year overall 13.3% - but this was less half the figure for 2007. The second half of the year must have been disasterous to pull them down so low.

2008 was a very bad year for the steel industry as the aggregate net profit of 71 medium and large steel producers fell 43 percent ... as weak demand drove down prices according to the China Iron and Steel Association (2). Regional demand for steel is drying up and Chinese spot steel prices fell 5.3 percent in a third consecutive weekly fall, on rising inventory after a much-anticipated demand recovery failed to materialise:
Japan's steel imports dropped for the third straight month, falling 31.5 precent in January from a year ago, as automakers reduced output and reported a 28-percent drop in sales last month. Steel production from South Korea tumbled 26 percent in January from a year ago and Japan saw a 38 percent drop to 6.4 million tons, the lowest level in 40 years. (3)
while the Chinese steel production is actually increasing, possibly to cover up the collapse in other sectors of the economy:

Brazilian miner Vale, the world's biggest iron ore producer, said late last week it expected to ship a record 30 million tons of ore to China in the first quarter.

"Demand (for iron ore) in China is coming back beyond previous levels...China is helping cover a lot of weakness in other markets," said Vale's director of ferrous minerals, Jose Carlos Martins.

China raised steel output by 10 percent in January from the previous month on top of a 7 percent gain in December, expecting a surge in demand in a post-Chinese New Year holiday in February, which failed to appear. (4)

This recklessness could trash the Chinese steel industry, because the already depressed price will only carry on down. The demand is just not there for the steel. People are not buying cars in the West. So car makers are not buying. Even flooding the market with cheap steel will not entice them to manufacture more cars, because they won't be able to sell them.

Over a thousand publicly traded firms that had released their full-year or preliminary earnings reports as of yesterday, have posted a 43.61 percent drop in profits, at 173.6 billion yuan, for 2008. In contrast, these 1,009 companies had posted a 32.18 percent year-on-year increase in profits last year, a report by TX Investment Consulting showed (5). Again, still showing a profit - but the rate is slowing drastically and thiswill be terrifying investors. What the linked report highlights as perticularly interesting is thatt the 1000-odd companies that have already reported only about a third of the total profit piled up in 2007. Another 500 companies made up the other two thirds. Those big companies are yet to report. If they do badly, then things could get very ugly.

Which is the big worry. If the Chinese economy falls apart, the country will probably fall apart as well. Historically, China has always been a seething mess of internal strife and warlords vying for power. Those days could well return if central control breaks down. Only this time the warlords will have nuclear weapons.

1 - 'China's home appliance industry slows in 2008,' by Yu Hongyan, published on chinadaily.com.cn, 26th of February, 2009. (http://www.chinadaily.com.cn/bizchina/2009-02/26/content_7516133.htm)
2 - 'Major Chinese steel makers' net profit down 43% in 2008,' unattributed article, publsihed on chinadaily.com.cn, 26th of February, 2009. (http://www.chinadaily.com.cn/bizchina/2009-02/23/content_7503555.htm)
3 - 'China spot prices fall again on inventory build-up,' unattributed press report, published on china.co.cn, 26th of February, 2009. (http://www.chinadaily.com.cn/bizchina/2009-02/26/content_7516046.htm)
4 - ibid.
5 - 'Mainland firms bleed heavily in 2008,' by Zhou Yan, published on chinadaily.com.cn, 26th of February, 2009. (http://www.chinadaily.com.cn/bizchina/2009-02/26/content_7513943.htm)

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