China's growth is slowing at a rapid clip, and for some reason that seems to come as a surprise to many Australian investors.
To put China's evolution into perspective, it might surprise you to learn that China used a massive 6.6 gigatons of cement between 2011 and 2013. In contrast, the United States used just 4.5 gigatons in the entire 20th century!
Source: Gates Notes – The blog of Bill Gates
What is perhaps even more shocking is the way this development was funded. Between 2007 and 2014, China's debt ballooned out from $7.4 trillion to an astonishing $28.2 trillion in 2014, all of which must be repaid.
By looking at those numbers alone, it is clear that growth like that cannot be sustained, and it seems only now that investors are beginning to realise it.
Just last week, the Chinese government released fresh economic data which forecast economic growth of just 7 per cent in 2015. That compares to the 7.4 per cent growth recorded in 2014, which was the nation's slowest growth rate in nearly a quarter of a century.
Alarmingly, this even prompted the government to proclaim slower economic development as the "new normal" after having clearly gotten ahead of itself in its expansion plans.
Of course, this is a huge problem for Australia's miners, who have played an instrumental role in driving China's economic growth over the years. While Chinese demand is responsible for roughly two-thirds of the world's seaborn iron ore, a slow-down in production will lead to a slow-down in demand, forcing the commodity's price lower.
Unfortunately, demand-side concerns are only one of the issues facing our miners …
At the same time as demand growth is diminishing, the world's largest iron ore miners are heavily ramping up their production rates in order to improve economies of scale and force weaker competition from the market.
In fact, another shipping record was recently broken at Pert Hedland's port whereby 35.6 million tonnes of iron ore were shipped in February. According to data from the port authority, that represents a total of 1.27 million metric tonnes shipped daily, surpassing the previous high of 1.21 million tonnes recorded in September last year.
This tidal wave of fresh supplies is also having a deadly effect on the commodity's price. Just last week, it fell below US$60 a tonne for the first time in nearly six years and analysts widely believe it will continue to slide for the remainder of 2015.
While BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: BHP) have the ability to cope with the lower price environment given their low costs and, in BHP's case, greater diversification, other miners are on the brink.
Mount Gibson Iron Limited (ASX: MGX) and BC Iron Limited (ASX: BCI), for instance, operate on higher costs and could be forced from the market should the iron ore price fall a lot further. This is especially the case given their lower quality ore which, in turn, attracts an even lower price than the ore produced by the majors.
Even Fortescue Metals Group Limited (ASX: FMG) is under pressure right now. Although it is Australia's third largest miner, it carries an enormous pile of debt which will become increasingly difficult to repay the further the commodity retreats in price.
What this means for you
The shares of iron ore miners have been hammered over the last 15 months, over which time the commodity's price has itself fallen more than 56 per cent from US$135 a tonne. While many investors are hopeful of a sudden rebound in prices, it would seem unlikely given the economic forces currently at play.
As such, investors should avoid the temptation to buy shares in the junior miners in the hope of making a quick profit. As it stands, some of them may struggle to continue as a going concern beyond this year.
Even the bigger miners present as a risk. While they are better equipped to cope with lower prices, their cash flows are still under pressure which could see their shares fall further over the next 12 months.
