Finance

The great Chinese growth engine starts to splutter: Kohler

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At the same time as Tom Albanese of Rio Tinto and OZ Minerals head Andrew Michelmore were ringing the bell to mark the end of the commodity super-cycle yesterday, China was releasing its trade figures for November.

At the same time as Tom Albanese of Rio Tinto and OZ Minerals head Andrew Michelmore were ringing the bell to mark the end of the commodity super-cycle yesterday, China was releasing its trade figures for November.

That news was the worst. Twenty-four hours after RBA Governor Glenn Stevens told us that China was slowing more quickly than anyone thought, he was proved frighteningly correct – exports fell for the first time in seven years, down 2.2% in November, and imports fell a shocking 17.9%.

It is the final shoe to drop for global recession and spells the end of the super-cycle. There must now be serious doubt about whether the crash in commodity prices since July is a short-term correction.

For Australia this is an unmitigated disaster. It virtually ensures that we will spend much of next year in recession.

For Rio Tinto, the reckoning has come early because the company blew it with last year’s acquisition of Alcan at the peak of the cycle using debt, and then rejecting BHP Billiton’s bid. One of those mistakes could perhaps be forgiven; making both unforgivable.

Rio will now be forced to sell the family silver – its best assets as well as its worst.

And just in case it can’t do that the company must – absurdly – maintain the dividend and slash staff numbers, so that the share price does not collapse and an equity raising remains possible.

I say absurdly, because cutting the dividend to preserve capital is the first thing businesses should be doing in this situation. But with asset markets and credit supply choked off, boards simply cannot afford to also cut off their access to the equity market by letting the share price go.

So they must keep bribing shareholders with high pay-out ratios in a desperate effort to keep their share prices up, even though every dividend cheque would be causing them physical pain.

That’s the situation Tom Albanese and his board find themselves in as they prepare for the refinancing of $US10 billion in debt next year, a prospect that must loom like the End of Days. They have to sack 14,000 good people and sell good assets, but the most they can do with the dividend is to not increase it.

But at least that’s still in the future, rather than the present, which is where the nightmare is for Andrew Michelmore and his colleagues at OZ Minerals.

How the two parts of OZ Minerals, Oxiana and Zinifex, managed to go from well-managed, cash-rich companies with high quality mines to defaulting on debts and facing total destruction in the blink of an eye is quite incredible, and will probably be examined in court under the microscope of a class action.

It is both an indictment on the board and management and an indication of how suddenly and completely the resources boom has come to a halt.

Commodity markets and the Baltic Dry bulk shipping index started anticipating a post-Olympic slump in China even as the opening ceremony was underway in Beijing.

And yesterday’s official trade numbers for November confirm what Glenn Stevens flagged on Tuesday night – that China is slipping into at least its version of recession, and possibly even what we would call a recession.

It’s even worse for commodity exporters like Australia because China enters this downturn with bloated inventories.

As a result there is now no doubt that Australia’s resources sector, and therefore WA and Queensland, will go into recession next year, which will be manifest in profit declines and staff cuts.

The Rio Tinto sackings in the Pilbara and in the coalfields of NSW and Queensland will unfortunately be just the start.

This article first appeared on Business Spectator

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