The China economy has endured a tough time of it of late, principally due to strict social restrictions and lockdowns derived from the country’s COVID-zero policy.
In June, the Organisation for Economic Co-operation and Development (OECD) forecast Chinese growth of 4.4 per cent in 2022, a decline from its prediction of 5.1 per cent growth in December 2021.
The manufacturing sector in China has been hit particularly hard by the aggressive COVID-19 suppression measures in key trading hubs such as Shanghai and Shenzhen, while construction activity is also down.
“Production, consumption (retail sales) and several real-estate-related indicators fell in April, with some respite in May,” the Australian Government’s Resources and Energy Quarterly for the June quarter stated.
“This is raising fears of a sharp economic slowdown in the June quarter, dragging down global growth.”
The Resources and Energy Quarterly, which contains forecasts for the value, volume and price of Australia’s major resources and energy commodity exports, said China’s ailing property sector was of particular concern.
“China’s residential property market remains a major risk to economic growth in 2022 as developers seek to deleverage and manage ongoing liquidity concerns,” the report stated.
“Consequently, new property starts continued to trend lower in April 2022–28 per cent lower year-on-year.
“To support the property market, changes were made in May to allow families with three children to own a second property in more than a dozen cities.”
So what does this mean for the Australian resources sector?
According to Mysteel, the price for 62 per cent seaborne Australian iron ore at the port of Qingdao was $US111.6 per dry metric tonne (dmt) at the time of writing (July 7), well above November 2021 lows but still below the mid-2021 highs.
The Resources and Energy Quarterly suggested iron ore price gains would remain muted.
“While China is still expected to ramp up infrastructure-related construction activity (raising its steel and iron ore demand) in 2022, recent outbreaks of the COVID-19 pandemic are delaying this upswing,” the report stated.
While iron ore export volumes are expected to rise from 876 million tonnes in 2021–22 to 929 million tonnes in 2023–24, the same can’t be said for the earnings.
“Australia’s iron ore export earnings are projected to ease from $133 billion in 2021–22 to $116 billion in 2022–23 and fall to $85 billion by 2023–24,” the report stated. “This reflects moderating prices expected over the outlook.”
The Resources and Energy Quarterly said China’s strict COVID-19 management measures is also affecting demand for metallurgical coal.
“Chinese metallurgical coal imports edged back in the first half of 2022, constrained by falling construction activity and COVID-19 disruptions,” the report stated.
“After an earlier surge in dwelling construction and real estate speculation, China now appears to have excess capacity in parts of its residential property market, with substantial vacancy levels apparent in many cities.”