Rio Tinto this week provided perhaps the best and earliest view of how it sees the Chinese economy travelling next year – no real improvement, as it set its iron ore guidance unchanged from 2022 levels.
The world’s largest iron-ore producer on Wednesday said it expects to ship between 320 million tonnes and 335 million tonnes of the steelmaking ingredient next year. It reiterated guidance for exports at the low end of the same range in 2022.
Rio recently trimmed reduced its 2022 guidance to the bottom of the 320-335 million range.
Given China is by far the biggest buyer, Rio Tinto sees no sign of any improvement in the outlook for steel and iron ore from the world’s second-biggest economy in 2023.
Rio’s steady as she goes forecast is in contrast to rival BHP which is looking at a small rise to a range of 249 to 260 million tonnes for the year to June 30, 2023 after 253 million tonnes were shipped in 2021-22.
BHP CEO, Mike Henry was effusive this week about China’s longer-term potential, telling an investment conference that “all fundamentals are in place” in China for continued economic growth over the next 20 years. He added that he expects to see an “increasing domestic drive towards economic growth in China”.
But there was no comment on China’s current outlook.
Rio’s other guidance forecasts for key China linked metals was mixed – aluminium slightly higher but copper (which China has a big appetite for) lower.
The lack of any confidence in China’s 2023 economic growth is a hard headed assessment from a company whose fortunes rest on getting assessments like this as right as possible.
What it is saying there will not be an upturn in demand for iron ore from the steel sector because of the continuing weakness in property and construction.
And even if those sectors respond positively to the emerging bailout, it will be fitful and likely to be damaged by the continuing Covid control confusion and suppression which is eating up domestic demand, as key surveys of economic activity across the economy this week have confirmed.
(And Australian investors should realise that if Rio sees no gain in demand for iron ore, there will be little strength in prices and the miner will be under pressure to control costs across 2023 to try and protect earnings and that will mean more pressures on its operations in the Pilbara.)
The start of month surveys of activity in manufacturing, as well as another private survey, have confirmed China’s economy is struggling to remain afloat at the moment.
The surveys fell short of market forecasts in a clear indication that the real level of activity last month was weaker than anyone had expected.
Confusion over Covid control measures, protests in a number of cities, mixed government measures on control and policing are all making for a worrisome end to 2022.
There are increasing forecasts that the impact of the latest Covid wave and the ham-fisted control measures are in the process of stalling the economy again for the second time in three quarters.
The China Beige Book, a privately owned survey of economic activity said this week that the number of companies affected by Covid outbreaks had more than doubled in recent weeks there may be worse to come.
The Caixin survey of SME manufacturers on Thursday produced the 4th monthly contractionary reading of 49.4 – better than October’s 49.2 and forecasts for a reading around 48.4.
The National Bureau of Statistics (NBS) official surveys of manufacturing and service sector activity on Wednesday showed bigger than forecast falls in November to levels not seen since the start of the second Covid outbreak last April.
Tellingly, the composite result was much lower than forecast, indicating an economy wide hit from the Covid confusion, lockdowns and botched government attempts to implement controls gradually, then the reversal as protests spread.
We know that Apple is facing a 30% plus shortfall in iPhone stocks for the global selling season in the run-up to Christmas because of problems at its huge assembly plant in central China.
Toyota this week revealed it was adjusting production volumes at some of its Chinese plants because of Covid, but didn’t give any numbers.
The China Beige Book claimed that about 53% of firms reported Covid outbreaks in November compared with 24% in October, based on a survey of 2,416 firms between November 17 and 27.
The ‘flash note’ from the private-owned publication said every key business performance indicator deteriorated, and no sector saw better results in November, as exports weakened and domestic consumption stalled, it added.
“Every sector is currently trending toward double-digit year-over-year growth declines,’’ the Beige Book said. “November is not typically the Covid peak, that comes in winter. The first quarter of 2023 could therefore be worse still.”
The Beige Book said companies reported that sales revenues and profit both recorded double-digit falls from a year earlier in November, while repeated lockdowns suppressed services and manufacturing, it added.
Meanwhile the NBS Composite (made up of the manufacturing and service sector survey outcomes) dropped to a seven-month low of 47.1 in November 2022 from 49.0 in the prior month (remember expansion is a reading above 50, contract is below 50).
The sharp fall indicated that overall production and operating activities of Chinese enterprises continued to slow down due to a surge in COVID cases and strict curbs, particularly in several big cities.
Both factory activity and the service sector contracted for the second month in a row, with each index hitting its lowest since April. China’s statistics agency, NBS, attributed the falls to “multiple factors” at home and abroad, including a more severe international environment.
The official NBS Manufacturing activity survey fell to 48.0 in November from 49.2 in October and below market forecasts of 49.0. This was the second straight month of contraction in factory activity and the steepest pace since April.
The survey showed that output (47.8 vs 49.6 in October), new orders (46.4 vs 48.1), and export sales (46.7 vs 47.6) all fell at a faster last month than in previous months back to April-May.
As well employment stayed weak, dropping the most in seven months (47.4 vs 48.3); and buying activity declined for the second month in a row, with the rate of fall the steepest since April. At the same time, delivery time lengthened the most in six months (46.7 vs 47.1).
And with the Chinese economy now dominated by services (around 60% or a bit more of total output) the sharper slide in the official NBS Non-Manufacturing activity survey was a big surprise.
The NBS said activity slowed to a reading of 46.7 in November from 48.7 a month earlier and well under the forecast of 49. This was also the second straight month of contraction in the services sector and the steepest pace since April as weakening demand and output hit home.
The bottom line is that around late January, the NBS will be reporting that China’s growth in 2022 was 3% or less, which would be the lowest outcome for decades.
