The RBA have released another report on Chinese residential property development. It’s of interest to Australia as that development requires large amounts of steel, and hence large amounts of iron ore. (image scmp.com)
The Reserve Bank of Australia performs a rather thankless job. It’s management and team must keep track of currency, markets, the economy, political expediency and attempt to read the tea leaves of data in an effort to be able to set the “appropriate” rate for cash in Australia. Given that commentators generally focus on mortgage debt (even though a large chunk of Australians don’t even have a mortgage), and most people who hold a mortgage would prefer that their interest rates go down rather than up… it’s a wonder that there’s anything positive to say about the efforts of the RBA at all.
But i’m personally a big fan of the RBA. It is my opinion that they are doing a great job, and are somehow managing to keep monetary policy under control in the face of a lack of forward-looking fiscal management. On re-reading that sentence, it does seem a tad double-Dutch… In english… Government policy is failing to address the key issues facing Australia today, so the RBA is forced to use its hammer solution to get things done. That is, move interest rates up or down to try to keep inflation and employment in boundaries. It’s a hammer solution, as interest rates apply across the board, and a drop in rates may be great for those with a mortgage but it can make life difficult for retirees and those looking to get a better interest rate on their cash. If you drop rates to help businesses that are suffering from retail spending changes or impacts of the Australian dollar being high… then you also foster a resurgence in speculation on property investment (or what-have-you) and can see bubbles build in areas that don’t need bubbles.
RBA Analysis of Chinese residential property
An an avid RBA supporter, i enjoy reading the various updates and research reports issued from time to time. i find them interesting, as they show the breadth and scope of RBA analysis and effort. And after a rather long introduction, we get to the reason for this particular post. A report issued by the RBA entitled
Chinese urban residential construction to 2040
http://www.rba.gov.au/publications/rdp/2012/pdf/rdp2012-04.pdf
Here’s the opening statement from that report…
In 2011, 1.9 billion square metres of residential floor space was built in China.
This volume is more floor space than the entire residential building stock in
Australia. The scale of construction is necessary, in part, to house the 20 million
annual increase in the urban population. Residential construction is a key driver
of Chinese economic growth and, given its use of steel, construction is an
important determinant of the demand for iron ore, which is one of Australia’s
most significant exports.
MORE THAN THE ENTIRE RESIDENTIAL BUILDING STOCK IN AUSTRALIA… That’s quite a bit, isn’t it?
In my eyes this is a beatifully written piece for an academically robust report. The authors of the report, Leon Berkelmans and Hao Wang, set out their reasoning for the idea that Chinese residential property development continuing to grow for a number of years yet.
This may come as news to those who have been watching the recent woes of any Australian company that digs up and ships iron ore to farflung destinations. Just have a look at three fairly representative players in the iron ore market…
Iron Ore miners have been hit hard
Is the “commodity boom” over? Iron ore prices hit iron ore companies hard this last year
Why are people selling shares in these companies at such hugely reduced prices? Perhaps it is the strident declarations of the “death of the commodity boom” and other such utterances making headlines in global media at the moment? Here’s one from the Wall Street Journal that suggests China’s appetite for resources is diminishing.
Naturally, Australian commentators are a bit skeptical of such grand announcements but whether this is home country bias, ignorance or far-sightedness is not a call that i am going to make. Following on from previous notes on the pricing of much of Australia’s assets being determined by speculators with incredibly short time horizons rather than long term investors, it is my thought that both the iron ore price and the pricing of many ore-related companies are being driven further down by the activities of speculators. This is simply my subjective opinion so don’t get too heated up about it – it’s just the most logical answer to the wild movements in prices we are seeing at the moment. Arguments about net present value calculations demolishing company value don’t add up to the level of price movements, at least not in my eyes they don’t.
The price of iron ore dropped below $100 a little while ago then quickly plummetted to less than $90. That just didn’t stack up in any rational analysis as most researchers were suggesting that a large chunk of Chinese mines would become unprofitable at those prices. These companies have some level of support/cash/ reserves but in a relatively short time they would start to go out of business. This would impact the supply and ‘voila!’ the price would need to alter back to something close to the marginal costs of the bulk of producers.
Why am i sharing these thoughts, when you can read or hear about any of this on the tv any night of the week? i’m just wanting to highlight the incredibly short-term nature of “investment” discussion in Australia right now. The iron ore price moves below $100 for a few weeks, and companies start selling assets, sacking staff, mothballing mines and pleading to fund managers for a bit of slack – which is generally not forthcoming. This would be kind of ok if the bulk of the price movements were long term investors making long term decisions – but they are not. Have a look at the scale of movements in the price of good ol’ Atlas Iron. It is has limited diversification and all that but it is also free of debt, has a lot of cash in the bank, and can moderate development plans in line with cashflow before it needs to consider taking on debt or raising equity. That’s a fairly good position for a price-taking miner. REMEMBER the Great Disclaimer here… i am not recommending you buy/sell or hold any particular asset or company or exposure to any of the assets or securities mentioned here. i’m just chatting about my view of how these assets are being treated by a fickle investment market right now.
Back to the RBA report.
If you get a moment or two – or are thrown out on to the couch one night, pour yourself a glass of your favourite poison and immerse yourself in this report. It’s a great peek into the subtleties of the growing giant that China is.
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