A double whammy for Australian miners

China’s crackdown on fringe financiers of iron ore and copper, as well as the potential fallout from recent developments in Iraq, are taking their toll on Australia's resources sector.

Two unfortunate events are converging on the Australian minerals industry. The first is obvious: the possible repercussions from war in Iraq, which include a fall in the US dollar and fears for world growth.

The second -- which is not being talked about -- is China’s crackdown on its fringe financiers, which started with iron ore and now embraces copper. Indeed China’s bank love-affair with copper metal looks like it is coming to an end. Both copper and iron ore were hammered again last night in US dollar terms. In Australian dollars, the fall was worse.

In the last few years Chinese banking institutions have funded apartment blocks using copper as a security. In Western terms it was always a bizarre arrangement but it enabled vast numbers of apartment blocks to be built, many of which remain empty.

More recently, since last October the Chinese banks have been funding copper stocks not linked to apartments in bonded warehouses. Much of the metal came to Shanghai and other Chinese centres from the London metal exchange.

It is always dangerous funding big stocks of metal because there is no income and once traders get a whiff that the stocks could come onto the market, the price falls.

Copper had a setback in February but was helped by the Chinese stockpiling the metal. It performed well until the end of May when a company called Qingdao Decheng was discovered to have irregularities in its books. It would seem that Qingdao Decheng financiers and others funding the copper bond stores decided the banks were too exposed, and that sent the copper price into a downward spiral.

Readers will remember that in January iron ore prices jumped because Chinese banks were funding steel mills via iron ore purchases in a variation of the apartment game. But the iron ore game was stopped and the iron ore price slumped, including another fall last night. It is unlikely copper will fall as far as iron ore unless there is a major liquidation of metal held to back apartments.

Longer term, given that China is looking to stimulate consumer demand, copper is likely to be well supported and unlike iron coal there is no build-up in production capacity. Indeed BHP has selected copper as a metal that should perform well in the future.

Last night we saw the Chinese copper banking gymnastics joined by selling of iron ore and all base metals. But oil prices rose, which helps our gas revenue.

Clearly currency punters fear that the US will be involved in Iraq so the US dollar fell, but yields on US government securities also fell so our high-yielding currency was pushed up. The worst of all worlds for miners. 

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles