Chinese steel mills come back from the dead
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The Chinese government is struggling with overcapacity in its steel sector, with older steel factories set to reopen. Throughout the year, the global economy has experienced subdued steel prices as a result of oversupply, with Britain, Australia, the US and Europe raising their concerns as their steel producers collapsed. The global steel industry has accused China of flooding the market despite decreasing demand. Attempts by China to downsize its steel sector have been unsuccessful, with the National Development Reform Commission, China’s economic planning body, only achieving a cut of 21.3 million tonnes of capacity, less than half of its annual target.
How does this relate to the HSC syllabus?
- Oversupply of steel has been a major issue in the global economy as a result of excess capacity in the Chinese economy. Excess capacity in the Chinese economy enables it to produce copious amounts of steel, which increases supply in the market. As a result, the price of steel decreases (Preliminary Topic 3 – Markets).
- Increased production of steel in China has been caused by older factories re-opening in response to higher steel prices. Since businesses would make more money from a sale of one unit with increased prices, businesses produced more to increase their inventory and take advantage of higher prices to increase their revenue (Preliminary Topic 2 – Consumers and Business).
- Low prices have caused other steel producers who do not have the benefit of a low labour cost base to suffer because their costs remain high while revenues decline. This has caused producers such as Arrium to collapse as their operations become unsustainable.
- Low prices have undermined China’s foreign policy as other economies such as Australia and the US have begun to accuse China of flooding the market which puts a strain on their economic relationships. The US in particular, have imposed aggressive anti-dumping policies (HSC Topic 1 – The Global Economy). This means that the US is trying to protect its steel producers from low prices by restricting the flow of steel coming from China to the US. Europe is beginning to consider similar measures.
Resilient Australian dollar a threat of terms of trade
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The Australian dollar has remained resilient over the year, defying ANZ’s forecast of US67c by the end of the year. At these levels, growth may be put at risk as growth was previously supported by a weaker Australian dollar which facilitated a transition to the services sector. This risk is significant given that growth is highly elastic to the dollar and while the current remains over the US7c mark the growth in services is likely going to fall. The issue with the high dollar is further accentuated by the fact that its appreciation is not supported by any fundamentals such as a mining capex cycle, but rather, speculation. Economists are expecting Australia to post an improvement in its terms of trade on the back of increasing volumes and prices of commodities which will add around 4% to Australia’s export revenue.
Forecasts for the Australia have been readjusted with ANZ predicting the AU to be US76c by the end of the year and UBS expecting it to fall to US70c.
How does this relate to the HSC syllabus?
- The appreciation of the Australian dollar has been criticised has being unsupported by fundamentals. In other words, the Australian dollar has not appreciated as a result of an increased demand for its goods and services which has increased demand for the Australian dollar, but because of speculation, causing investors to increase their demand of the Australian dollar (HSC Topic 2 – Australia in the Global Economy). Importantly, the speculation surrounding the US rate hike and delays in increasing the US Fed Funds rate has caused investors to purchase the Australian dollar. This is because Australia has one of the highest interest rates of the developed countries and failure of the US Federal Reserve to increase their rates maintains this position so that investors seeking returns increasingly buy Australian dollars to earn these returns.
- The high Australian dollar can be particularly damaging to Australia’s growth and trade balance. Previously, the depreciation of the Australian dollar from parity enabled the economy to shift towards selling services as the lower currency made the sector more competitive. The increased competitiveness in service can be attributed to the fact that the lower Australian dollar meant that foreigners would need to pay less foreign currency to obtain an Australian dollar to pay for such services. Conversely, the higher Australian dollar now is expected to damage international competitiveness of Australia’s exports (HSC Topi 2 – Australia and the economy).
- Evidence has shown that growth in Australia has been highly elastic to changes in the Australian dollar. This means that growth is sensitive to changes in the Australian dollar, such as an appreciation (Preliminary Topic 3 – Markets). The high reactivity to an appreciation is detrimental to Australia as it suggests that growth will begin to slow. Slowing economic growth can be attributed to the lack competitiveness in Australia’s exports when the dollar is high. The reduction in competitiveness leads to a reduction in demand, thereby reducing Australia’s export revenue and decreasing aggregate demand (AD = C + I + G + X – M).
Theresa Dang is an economics mentor at Keystone Education. She attended Sydney Girls High and achieved an ATAR of 99.70 in 2012. She is now studying Commerce and Law at the University of Sydney. She has experience in a global technology firm and a mutual fund.
Gary Liang is the founder and director of Keystone Education. He attended Sydney Boys High and achieved an ATAR of 99.95 in 2012. He achieved 5 state ranks in Mathematics, Mathematics Ext 1, Mathematics Ext 2, Chemistry and Economics. He is now studying Economics and Science (Advanced Mathematics) at the UNSW Australia, where he is the recipient of four scholarships.