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As The Iron Anvil Falls, Will Australia Be Stuck Below It?
Iron ore prices, which have fallen by 24% in the past month, have been front and center in our views on the China debacle recently. Following the RBA's decision not to cut rates last night we thought Macquarie's recent insight into just how bad an impact a sustained weakness in demand could have on the Australian economy was worthwhile, as hope seems to remain that the destocking among Chinese steel mills will end at some point and demand will re-emerge phoenix-like (though we strongly suspect not).
Sharp falls in commodity prices undermine mining company cash flow, which could prompt firms to divest assets and cut capex budgets - borne out by estimates of a 50% cut in capex for Rio and BHP if pressures remain.
With mining investment the mainstay of the Australian economy, this would have profound implications, as business investment would drop (consensus 2013 investment forecasts would fall by 20%) - implying a 4ppts slash in final demand growth or more specifically up to a 3ppt cut in GDP...
and a 4ppts rise in the unemployment rate...
The critical aspect is the economic deterioration (and lower commodity prices) would for sure prompt action from the RBA - which would in turn remove support for the AUD (a key carry driver for risk around the world). Furthermore, the combination of reduced mining company profits and weaker economic growth would place severe strains on government revenue and lead to a large budget deficit. That may also undermine foreign investor appetite for Australian government bonds which has also supported the AUD.
It seems AUD remains too resilient relative to its dominant factors... consider the impact on global risk assets if AUD drops 20%...
Macquarie, Australia Without Mining: Conclusion
- Our base case is that commodity prices do improve from current levels as the Chinese destocking cycle eventually comes to an end. But even if the present period does not signal an early end to the mining investment boom, it might be a foretaste of things to come at a later stage. This note has presented a scenario taking as our starting point the potential impact on mining investment that would occur as mining companies cut spending in response to reduced cash flows.
- In our view, three points quickly emerge.
- First, that the impact of a rapid decline in mining investment would be severe on the economy.
- Second, that one should not take too much consolation from the fact that there are still many investment plans on the books: if cash flows evaporate, investment will be cut back.
- Third, that the current level of iron ore prices is not consistent with the current level of the A$. In the past we have argued that the A$ is not solely driven by commodity prices, but that interest-rate differentials and Australia’s AAA credit rating have become increasingly important factors. But as we have argued in this note, if iron ore prices were to remain at current levels, that would have a material impact on those other factors that are currently supporting the A$.
- In our view, the relative resilience of the A$ suggests that most investors believe that iron ore prices will recover over the next few months. But if they don’t then this could be the “Wile E. Coyote moment” for the A$. What we are referring to here is the well-known cartoon character who, when he's chasing the Road Runner, frequently runs off the edge of a cliff. But, initially at least, he doesn’t fall. His legs are still running as if he is on land and he remains suspended in mid air. But then he looks down, and realises that there is nothing supporting him, and it is only then that he succumbs to the forces of gravity and plunges towards the valley floor.
Source: Macquarie
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Crikey!!!
I'm dealing with Euroland.......you're on you own mates!
AUD/USD, it's Australian for deflation, mate!
Today, the steel futures on Shanghai Futures Exchange hit a 4-year low. At the same time, the steel inventory in China is still much higher than last year. Australia will be utterly screwed...
A few (thousand) bridges to nowhere will fix that.
Even just a bit screwed would be nice as I am very short AUD
Why? have the chinese figured out how to eat steel and iron ore? The Aussies still have a strong agricultural sector. Perhaps they will simply trade china for some of those finished steel products.
Nah we're selling off all our best farm land to foreigners or allowing the miners or the frackers to dig it the fuck up...so yeah, we're pretty screwed down here.
The lost tax revenue from cigarette conterfieting (plain packaging) and out-right banning (born after 2000) will not help matters either.
Government will more than make up for that by nationalising all our gold mines.
I read where hugh hendry was shorting Japanese steel manufacturers anticipating a sizeable drop in the price of steel because of a big China slowdown
Perth property pices fall -- again
http://www.heraldsun.com.au/news/national/perth-property-prices-fall-aga...
House prices set for further annual fallhttp://www.tradingroom.com.au/apps/view_breaking_news_article.ac?page=/d...
...and so on for all of Ozland as their Housing Bubble enters "correction."
Yup. The collapsing housing bubble and subsequent RBA rate cuts are going to be the coup de grace for the AUD.
The desperation of the vested interests is getting palpable.
In Australia's largest newspaper there are now several articles a day spruiking property. There are several reporters whose ONLY job is to unscrupulosuly try to push debt onto young people to sustain the ponzi.
They now have the CEOs of real estate firms write their property analysis, literally:
http://smh.domain.com.au/buyers-less-cautious-market-on-the-rise-20120903-25a5i.html
What else would anyone expect from a corrupt monetary system the depends on exponential and infinite growth. The world defaults (via hyperinflation or hyperdeflation-matters not) or the debt is cleared. Painful either way, pick your poison, bitchez.
China.
The elephant in the Goldmanfish bowl.
>Damit, watch where you're putting that trunk.<
Who needs iron when you can have gold and lead ?;o)
http://www.youtube.com/watch?v=lX5tfRdkoY0
Debased AUD = QE down under ?
the cocky aussies and the cocky canucks need to be taken down a few pegs by commodity deflation- but with Benny the hebe hovering that will be tough.
Commodity prices may stay high in QEworld, but cashflow will still take a hit if your main clients stop buying. In theory - but nothing much is playing out to that book.
I'm sure the miners can keep the lid on labor costs by shooting a few of the workers. That will help the bottom line.
The richest person Gina Rhinehart (mining billionaire) in Australia has called on her country's poor to smoke and drink less, and to stop complaining about their plight and work harder to get rich.
http://www.ctvnews.ca/world/richest-woman-poor-should-smoke-and-drink-le...Well...more or less...that's pretty good advise.
Doesn't mean we actually have to do it.
It goes against the grain of current consumer society, whatever else can be said about her or her economic policy advice.
Whereas she got rich the old-fashion way: INHERITANCE.
From the looks of it Gina should eat less or exercise more, or both.
That's rich, no pun intended, coming from a fat fugly bitch that inherited her wealth.
The big mining tycoons will see their fortunes slashed by 90 percent, if they're lucky. Gina Rinehart and Eike Batista's fortunes are going to take a pounding.
New kid on the block, Nathan Tinkler, touted only in the last 12 months as some kind of mining business genius, is already on the ropes. He even bought a rugby league team.
Yeah he had the equivalent of winning the lottery. He should have cashed in his $1 billion and gone home instead of trying to become Glencore. That kind of stupidity results in a fool getting separated from his money real quick.
Dump iron ore, buy food. Best trade of the decade. And yes, hoard the AU - that stuff goes up no matter what happens.
Australia is an irrational bubble. They are extremely protectionist, allowing only rich foreigners in. Cashiers at the grocery store earn an outrageous 22 aud/hr or more. Simple truck drivers earn 100k per year, or more. The govt there fully manipulates the housing market so that supply always follows demand. The median home price is at around 500k. No wonder that everyone, despite making great salaries, still bring brown bag lunches to work. Somethings gotta give, especially when mining accounts for 25% of their gdp.
My wife works there as an English techer for immigrants. Her salary is nearly 4 times higher than mine, and if it weren't for her living with family there she would just barely be able to afford housing and food, not to mention the new taxes and the permits that are required for her to work there. Sure she's making great money because she is staying with family, but that is the only reason she is capable of keeping up with everything.
I was there just two months ago, and everything is ridiculously over-priced even before the Carbon Taxes came into effect. The Government employees though are making even more. The fatass ticket checker, yes this is a real government position there, makes twice as much as my wife. All that guy does is check to make sure people on the buses have a ticket and to search and report on drug usage. This guy weighed easily 400 lbs, and dealing with his stench on the bus was nearly unbearable. That system is ready for a collapse, there's no way it can stay afloat without an outright police state.
I moved from there to the US over 10 years ago. Since then, salaries in my field have barely risen nominally but instead retracted based on inflation and COL in Australia. Salaries however in the US have almost doubled over the same period where I live and in my field. Interestingly, the "high cost" items such as cars, housing, have actually dropped in price making the US by far the best place to live in the world.
PS I've lived in 7 countries and travel on a regular basis.
I'm similar, I've lived in several countries and travel for work. I spend most of my time in the US, but only half the year am I actually here. I don't mind being in the US, I just hate dealing with most of the people.
The big dicks are calling for a lower AUD, the competitive devaluation bandwagon is getting away from the AUD.
The problem is that the Australian housing market was "saved" recently by juicing it with even more debt. That leaves almost all the middle class up to their gills in non self liquidating debt.
The demand for the AUD may find itself driven by the resultant debt deflation from now on. The idiots in charge of this housing shit show at the RBA are going to get a taste of the kind of appreciation that bernanke is used to going forward.
The failures of the central planners down under will hurt Australians who have simply been going about their business following the carrot of willfully distorted price signals.
The AUD could hold up well against currencies like the GBP consider that
1. they are already monetizing
2. They produce nothing for export.
3. Much bigger public sector.
4. More welfare generally.
I feel sad for Australia, successive governments seem hell bent on bankrupting it with flagrant disregard for the Australian people ...
it's a hard one to call. On one hand, the RBA may drop rates to debase the currency and try effortlessly to spur exports to no avail. On the other, all that debt defaulting will make dollars scarce.
There will definitely be social disruption due to the foreclosure laws down there. Governments will naturally side with the banks and broke bogans will be stuck with overpriced shacks.
My bet is that the AUD will be 0.5USD within a couple of years
As you say anything could happen , good luck with it all.
Key carry driver??? How do you figure that? Interest rates are quite high in Australia, and the currency can only go down from here - why would anybody be using it for carry trade?
https://www.google.com.au/search?q=aud/jpy+carry
http://www.wiseacre-gardens.com/toons/wile_fall.jpg
yea i feel like wile e cuyote, out here. we still spending like theres a freight train full of lovley miner profits to gobble on down. yum yum , houses to da moon. etc. tax them to. christ when is the penny going to drop around here?
check out the latest fed papers. the usa gave the aussies around $54billion to keep their banks up and lending. they played a good game when commodities prices went thru the roof but they still had mountains of bad debt. they are just as fucked as the rest of the world. funny how blind humans are. why didnt the aussies save while the prices and sales were good. then look at how stupid the rest of the world was by going into debt....they didnt...they acted just like we did and are going to reap the rewards now.
We blew it all because we thought the party would last forever. Now with crippling hangover looming, we are stumbling around our wrecked apartment, drinking the last dregs in leftover beer bottles, trying to avoid the inevitable for a little longer.
What's Ozzie for "We Buy Gold"?
Gold is hardly mentioned unless you happen to drive a rig In the mines at Kalgoorlie it's all about beachfront property and getting rich by buying 10 houses you can't afford.
There will be pain.
Ouch....
Funny how the company that wrote the report is on the hook for several hundred million <insert boomerang here> in foreign currency debt issues. Too bad about their ill-timed expansion plans and bloated expense line. Good luck on that next financing!
great gloom and doom text, thanks much! AUSTRALIA 10 years ago measure on commodity, most rich on earth, and, it most be still the
most rich on commodity country to this day!