Ground lost on unease at China slowing

THE sharemarket lost ground this week, by the thinnest of margins, shedding 0.1 per cent as concerns about a slowdown in Chinese manufacturing saw big resource stocks retreat.

By InvestSMART · 24 Mar 2012

By InvestSMART ·
24 Mar 2012

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THE sharemarket lost ground this week, by the thinnest of margins, shedding 0.1 per cent as concerns about a slowdown in Chinese manufacturing saw big resource stocks retreat.

A fall in the value of the dollar it slid to a two-month low below $US1.04 did help local companies with overseas earnings.

But much of the week was dominated by mining or resource-related news.

For the week, the benchmark S&P/ASX 200 Index lost 5.75 points, or 0.1 per cent, to 4270.4.

With concerns about Greece fading, comments from International Monetary Fund managing director Christine Lagarde that the US and European financial systems looked slightly healthier, gave investors confidence that things were improving.

But they reacted harshly to news that BHP Billiton iron ore division president Ian Ashby said growth in Chinese demand appeared to be "flattening", but that the company remained confident in the long-term demand for commodities generally.

Resource stocks were sold down from Tuesday, when the news broke, with the materials sub-index slipping 1.77 per cent through the week, the worst sector overall.

A watered-down version of the federal government's mining tax passed into law, affecting the so-called "super profits" of the country's iron ore and coal miners. Fortescue Metals said it would take the matter to court.

HSBC's preliminary purchasing managers index showed manufacturing activity in China slipping for the fifth month in a row.

Investors further reduced their exposure to resource stocks.

Yesterday, BHP Billiton was down 40?, or 1.2 per cent, at $34.40, Rio Tinto gave up 97?, or 1.5 per cent, to $63.70 and Fortescue Metals Group slipped 8?, or 1.3 per cent, to $6.

Sands miner Iluka dropped 55?, or 3.2 per cent, to $16.90.

Australia's largest goldminer, Newcrest, backtracked 35?, or 1.2 per cent, to $29 after a substantial shareholder reduced its stake by more than 1 per cent.

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Frequently Asked Questions about this Article…

What happened to the Australian sharemarket this week and how big was the move?

The market barely lost ground — the S&P/ASX 200 fell 5.75 points, or 0.1%, ending the week at 4,270.4. Concern about a slowdown in Chinese manufacturing and weakness in big resource stocks drove most of the action.

How did worries about a Chinese manufacturing slowdown affect Australian resource stocks?

Reports that Chinese manufacturing activity has been slipping (HSBC's preliminary PMI showed a fifth consecutive monthly decline) and comments that Chinese demand may be "flattening" prompted investors to reduce exposure to resource stocks. The materials sub-index slid about 1.77% for the week.

Which major miners were hit this week and what were their share moves?

Several large miners fell: BHP Billiton was down about 1.2% to $34.40, Rio Tinto fell about 1.5% to $63.70, Fortescue Metals Group slipped about 1.3% to $6.00, Iluka dropped about 3.2% to $16.90, and Newcrest backtracked about 1.2% to $29 after a substantial shareholder trimmed its stake by more than 1%.

Did the weaker Australian dollar influence companies with overseas earnings?

Yes. The Australian dollar slid to a two-month low below US$1.04, which helped local companies that earn revenue overseas by improving the value of those foreign earnings in Australian-dollar terms.

What did BHP Billiton say about Chinese demand and the long-term outlook for commodities?

Ian Ashby, president of BHP Billiton's iron ore division, said growth in Chinese demand appeared to be "flattening," but the company remained confident in the long-term demand for commodities generally.

How did changes to the federal mining tax affect miners and what was Fortescue's response?

A watered-down version of the federal government's mining tax passed into law and targets so-called "super profits" from iron ore and coal miners. Fortescue Metals Group said it would take the matter to court.

Did international signals improve investor confidence despite resource weakness?

Yes. With concerns about Greece fading, IMF managing director Christine Lagarde's comment that US and European financial systems looked slightly healthier helped restore some investor confidence, although resource news dominated trading.

What's the practical takeaway for everyday investors from this week's market moves?

The week shows how sensitive the ASX and big resource names are to Chinese manufacturing data, mining tax developments and currency moves. The overall market barely fell, but investors pared holdings in materials stocks while corporate commentary (like BHP's view that demand may be flattening yet remains solid long-term) reminded markets of ongoing commodity exposure and policy risks.