HDI v HPI

Just covering Human Development Index and Human Poverty Index with my A2 class and I am came across this useful graphic explaining both.

A HDI below 0.5 is considered to represent “low development”. All 22 countries in that category are located in Africa. The highest-scoring Sub-Saharan countries, Gabon and South Africa, are ranked 119th and 121st, respectively. Nine countries departed from this category this year and joined the “medium development” group.

A HDI of 0.8 or more is considered to represent “high development”. This includes all developed countries, such as those in North America, Western Europe, Oceania, and Eastern Asia, as well as some developing countries in Eastern Europe, Central and South America, Southeast Asia, the Caribbean, and the oil-rich Arabian Peninsula. Seven countries were promoted to this category this year, leaving the “medium development” group: Albania, Belarus, Brazil, Libya, Macedonia, Russia and Saudi Arabia.

Does being poor mean lack of income?

An engaging article from The Economist suggesting that income is not the only aspect of life that people care about. There are other variables that have an impact on people’s lives. The Oxford Poverty and Human Development Initiative have devised the Multi-Dimensional Poverty Index (MPI) which asks 10 questions:

2 on education
2 on health
6 on household standard of living

Each of these is given a weighting in the overall index. A household is deemed poor if its hardship adds up to at least 33%. The index addresses other developments not just income per day. Nepal improved health and living standards but was slower to improve education or widen access to drinking water. In Rwanda the availability of water and sanitation accounted for a large part of its development. Ultimately the index focuses the importance of measuring standards of living away from consumer durables to that of drinking water, sanitation and health. Policymakers have in the past looked at statistics in a vacuum with a focus on purchasing power rather than other variables of equal importance.

Malaysian Economy – some positive indicators

On a hockey tour in Malaysia and its has been interesting to observe the pace of development here in Kuala Lumpur. Everywhere you look there is a high rise block being built with work continuing well into the night – there is definitely a buzz about the place. However, as yet we haven’t ventured into the more rural parts of the country to experience first hand the local communities and their economies. Here is some information on the main characteristics of the economy:

* Malaysia is well-endowed with natural resources in areas such as agriculture, forestry and minerals.
* It is an exporter of natural and agricultural resources, the most valuable exported resource being petroleum.
* At one time, it was the largest producer of tin, rubber and palm oil in the world.
* In terms of agriculture, Malaysia is one of the top exporters of natural rubber and palm oil, which together with sawn logs and sawn timber, cocoa, pepper, pineapple and tobacco dominate the growth of the sector.
* Palm oil is also a major generator of foreign exchange.

Source: Wikipedia

Malaysia’s product exports in 28 color-coded categories

Outlook for Malaysia from The World Bank

* Malaysia’s economy expanded to 5.1 percent in 2011.

* GDP growth exceeded earlier estimates because the Government stepped up public consumption spending towards the end of the year and also because of higher investments by public and private companies.

* GDP is expected to continue to expand healthily in 2012 by 4.6 percent in 2012 and, assuming the global economic recovery picks up, 5.1 percent in 2013.

* Inflation has started to decline, with stabilizing food prices and falling transport costs.

* Unemployment held steady at low levels. Job creation was healthy, accommodating new workers and a higher participation rate.

* Jobs lie at the core of a strategy to achieve Malaysia‘s objective of becoming a high-income economy that benefits all Malaysians. In this regard, Malaysia needs to create more “modern jobs” and modernize its labor markets. ‘Modern jobs’ involve a higher and more diverse set of skills such as communication, problem-solving, and proficiency in modern information technology. Modern firms in a high-income economy derive their competitiveness from the productivity and talent of their workers, not low wages.

Trade Flows: South-South greater than South-North

Recent figures have shown that the trade from developing country to developing country (South-South) has now exceeded developing country to developed country (South-North) – see chart from The Economist. The World Bank reported that in 2002 developing countries bought only 40% of total developing country exports with the remainder going to developed nations. According to the World Bank this figure is over 50% today but is not surprising when you consider the following:

- Developing countries have been growing at fast rates
- Between 1991 – 2011 developing countries share of world trade doubled from 16%-32%
- Developing countries have also been major borrowers
- Developing countries have had major foreign investment especially BRIC countries
- As developed nations struggle in the aftermath of the GFC developing countries have taken over more of their export markets.

But there is still a lot of interdependence – developed countries are of great importance to developing nations. The Euro crisis has had an effect on trade to and from developing countries and although trade between developed countries has increased it has been that with developing countries that has grown considerably greater.

Chinese growth = blow up bridge and rebuild it.

Another very useful clip from Paul Solman of PBS News. China has for quite a few years now gone down the route of government planning to keep economic activity buoyant. Assumptions have been made that in 10 years time there will be 200 cities in China with over 1 million people and 8 being over 10 million. However a recent blog post showed that there are ghost towns in certain areas of China with empty housing estates.

An example of artificially creating growth, as well as building host cities, is have a 7 year old bridge (built to last for 40 years) blown up and rebuilt. This generates jobs for construction industry including contractors for different aspects of the bridge. This likens to Keynesian policy where J.M.Keynes said that you should dig holes and fill them in to keep people employed. The Soviet Union found that central planning is good at mobilising resources, but is not good at sustaining innovation, or incentives that promote long-term growth. What China needs is more domestic consumption and move away from a reliance on government investment projects and export revenue. As ever Paul Solman explains things well.

Holiday Reading

No doubt most of you will be heading to the beach for part of the summer holidays. Here are a couple of books that look like a good read. I will be back on the blog in the middle of January.

Paper Promises: Money, Debt and the New World Order [Paperback] by Phillip Coggan

In today’s financial climate, we are all, naturally, obsessed by debt. In almost every aspect of our life we experience it – on our credit cards, mortgages, bank loans and student loans. But where has this debt come from? How does it work? What is any money really worth? And what promises do we need to believe to keep the whole system afloat?

In this fascinating look at money through the ages – including our own unstable future – award-winning financial journalist Philip Coggan examines the flawed structure of the global finance systems as they exist today, and asks, with deeper imbalances that the world is currently facing, what’s actually at stake. Amazon.co.uk

Winner Take All: China’s Race for Resources and What It Means for the World [Hardcover] by Dambisa Moyo.

Commodities permeate virtually every aspect of modern daily living, but for all their importance—their breadth, their depth, their intricacies, and their central role in daily life—few people who are not economists or traders know how commodity markets work. Almost every day, newspaper headlines and media commentators scream warnings of impending doom–shortages of arable land, clashes over water, and political conflict as global demand for fossil fuels outstrips supply. The picture is bleak, but our grasp of the details and the macro shifts in commodities markets remain blurry.

Winner Take All is about the commodity dynamics that the world will face over the next several decades. In particular, it is about the implications of China’s rush for resources across all regions of the world. The scale of China’s resource campaign for hard commodities (metals and minerals) and soft commodities (timber and food) is among the largest in history. To be sure, China is not the first country to launch a global crusade to secure resources. From Britain’s transcontinental operations dating back to the end of the 16th century, to the rise of modern European and American transnational corporations between the mid 1860’s and 1870’s, the industrial revolution that powered these economies created a voracious demand for raw materials and created the need to go far beyond their native countries. Amazon.com

How Do We Fix This Mess?: The Economic Price of Having it All, and the Route to Lasting Prosperity [Hardcover] by Robert Preston

In Robert Peston’s new book he explains in his characteristically straightforward way how the world got itself into the current economic mess – and how we might get out of it.

‘How do we fix this mess? I don’t know. But don’t stop reading now. Perhaps if we have a clearer understanding of what went wrong, we’ll have a better idea of what needs to be done. This book is a map of what needs to be fixed.’

The record-breaking unbroken growth between 1992 and 2008 wasn’t the economic miracle that it seemed. It was based on a number of dangerous illusions – most notably that it didn’t matter that the UK and US year after year consumed more than they earned.

But we couldn’t go on increasing our indebtedness forever. The financial crash of 2007/8 and the subsequent economic slump in much of the west was the moment when we realised we had borrowed more than we could afford to repay. Amazon.co.uk

What does Poverty mean in the 21st Century?

Here is a trailer to a new series from the BBC World Debate programme on poverty.

Why is that despite all our advancements, technological progress and increasing wealth, the twin scourges of extreme poverty and inequality still blight the lives of vast numbers of people in the 21st Century?

Joined by the former British prime minister Tony Blair, Oby Ezekwesili, a former Nigerian government minister, Vandana Shiva, a scientist and grassroots activist from India and the South African author Moeletsi Mbeki, Zeinab Badawi hosts the BBC World Debate from Johannesburg.

There are 5 parts to the series which cover the following:

Part 1 The causes of poverty
Part 2 The need for opportunity
Part 3 The prospects for Africa
Part 4 The importance of agriculture
Part 5 Possible solutions

Click the link below to go to the BBC webpage and view the debate.

BBC World Debate – Why Poverty?

Libya – Fastest growing economy in 2012 but what does it mean?

The Daily Chart in The Economist recently looked at the fastest growing and contracting economies since 1980. The main points:

Fastest Growing: In 2012 Libya with 122% growth came out on top – due to the recovery of oil production. However you must remember that this is a % change from the previous year when the economy contracted by about 60% with the civil unrest and the departure of foreign oil companies. Statistically this creates a smaller base when you calculate % change.

If a country’s GDP shrinks by 60%, it must grow by 150% just to restore its former size. Thus even if Libya fulfills the IMF’s forecast for this year, its GDP will still be smaller than it was in 2010

The Economist also looked at other countries that had fast growth rates but this was predominately due to a disaster of some sort in the preceding year or the discovery of a natural resource.

Equitorial Guinea – In the 1990‘s very poor and depended on cocoa and timber for income. 1996 they discovered oil and attracted FDI. After producing 80,000 barrels per day increasing GDP by 150%.

Kuwait – contracted 41% during the first Gulf War on 1991 but grew 50% the next year as growth started to return.

Nigeria’s Oil Industry – some worrying stats

Here are some statistics from The Economist on the oil industry in Nigeria.

* Nigeria produces 2.7m barrels a day
* 400,000 barrels of oil a day were stolen in April 2012
* $400bn of Nigeria’s oil revenue has been stolen or misplaced since independence in 1960
* Its 4 refineries work far below capacity, forcing Nigeria to import most of its fuel
* Government subsidies for petrol cost $16bn in 2011
* Fraud of $6.8bn has been exposed over a subsidy for petrol imports
* Pipeline sabotage accounts for more than 50% of the oil spills in Nigeria’s oil producing delta.

Regulatory uncertainty has assisted in making Nigeria’s oil industry stagnant – output is the same as it was a decade ago. However the major concern is that all this oil wealth should have benefited the population but the majority of them still live on less than $2 per day.

The Chinese ship – back on course

Some figures for September show that the Chinese economy is tentatively starting to come out of its slowdown.

Exports rose to 9.9%
GDP for Q3 rose by 7.4%
CPI – 1.9%

The CPI figure is encouraging in that it gives the Peoples’ Bank of China plenty of room to ease monetary policy if they need to as the Inflation target rate is 4%. They have also pumped an additional US$42.15bn into the economy in order to stimulate growth. According to the National Australia Bank (NAB) the use of these measures appears to be the preferred method of monetary easing ahead of the start of the Communist Party Congress which starts on 8 November, where a new leadership team is set to be installed. The installation of the new leadership team could pave the way for a cut to the reserve requirement ratio and for fiscal stimulus. Many commentators envisage a soft landing for China.

India needs to boost manufacturing

The Economist recently did a Special Report on India and one of the problems that it mentioned was the lack of a manufacturing sector. Unfortunately unlike the rest of South-East Asian economies over 50% of the workforce are still involved in the agricultural sector. However it is interesting to see the breakdown of GDP per sector:

Service sector makes up 59% of GDP and is still expanding,
Agriculture 19% and
Manufacturing 22%.

The Economist suggests that more factories could provide jobs that would ease the pressure of 13m people that join the Indian workforce every year. What are the issues regarding its expansion:

* Bureaucracy and a poor infrastructure
* Labour costs are relatively high compared to other East Asian countries
* High cost of credit
* Weaker ruppee makes it advantageous for overseas companies to base their production

But there seems no prospect of a big leap in Indian manufacturing in the near future. And if services are to keep expanding, the country needs huge quantities of skilled labour that will not be easy to come by.



Source: The Economist – September 29th 2012

AS Revision – Tariffs and Protectionism

Here is another worthwhile video from Phil Holden. This time he is talking about Tariffs and Protectionism which is in Unit 4 of the AS course. However you will be expected to know this at A2 level also. Remember the following reasons for barriers to trade:

Why Protectionism?
a) Safeguard home country employment
b) Correct balance of payments disequilibria
c) Prevent labour exploitation in developing countries (or other political – not economic – goals)
d) Prevent Dumping
e) Safeguard infant industries

BRIC Update

With the CIE A2 Paper 4 exam approaching I thought it would be useful to update what is happening in the BRIC countries – remember developing countries is a popular area that is examined. I was very fortunate to attend the Tutor2u 10th Anniversary Conference in June this year where one of the keynote speakers was Jim O’Neill of Goldman Sachs who coined the acronym in a 2001 paper entitled “Building Better Global Economic BRICs”.

The BRIC’s are struggling hard to ease policies and maintain economic growth in the face of a slowing global economy not of their own making. Although you might think that these rates are high in a developed nation for these 4 developing countries growth rates need to be maintained at much higher levels in order to keep apace with the factors of production that are coming on stream.

One of the reasons for the slowdown is the economic situation in Europe and the downturn on the USA followed by their own uncertainty associated with the coming fiscal cliff. There are also consequences of the BRIC slowdown are on the commodity market. BRIC countries were the reason behind the economic growth in the past decade, which meant they had a great affect on commodity prices. As economic growth decelerates rapidly in these countries, so does energy and commodity demand. Downward pressure on oil prices and other key commodities, such as copper, are likely to continue until one can be sure that the growth trend in the emerging market countries is moving higher again. We are not at that stage yet. BRIC nations, in their own

Other reasons for the growth slowdown is the ever worsening economic situation in Europe, followed closely by the general lack of economic leadership and market confidence coming from the aging industrial countries. One cannot, however, lay all of the economic challenges in the BRIC countries at the doorstep of Europe’s debt crisis and the massive policy uncertainty associated with the coming fiscal cliff in the US.

BRIC currencies represent high-risk, high- return carry trades, due to the near-zero level of interest rates in the U.S., Europe and Japan compared to the much high rates in the emerging market world. When BRIC currencies start to appreciate it will be a sign of confirmation of two important new trends.

1. A necessary, but not sufficient, condition for BRIC currency appreciation is that the global deleveraging process is abating.
2. To complete the scenario, economic growth and the ability to attract capital needs to return to the BRICs.

Source CME Group Market Insights – 25th July 2012

BRIC’s in 2011 – Source: The Economist – 29th Sept 2012

New Zealand agricultural sector – lowest subsidies amongst OECD

Having just taught the Developing Economies topic at the UNITEC A2 revision course I couldn’t help noticing this graph that was in The Economist last week. This was extremely useful when you look at how developing nations are locked out of the trading system by the subsidies given to those developed nations agricultural sectors. For years the World Bank and the IMF have forced developing nations to stop subsidising their agricultural sector.

Government support for agriculture in the mostly rich countries of the OECD amounted to $252 billion in 2011, or 19% of total farm receipts. Although there is a move away from support linked directly to production, it is still about half of the total. The general trend is downwards: compared with the second half of the 1990s subsidies fell in all countries. But levels of support vary widely. In Norway, Switzerland and Japan, more than half of gross farm receipts in 2009-11 came from support policies; for producers in Australia, Chile and New Zealand, it was less than 5%. Commodity prices will stay high for some time, suggests the OECD, so markets will provide the farm income that many governments have tried to prop up.

Dambisa Moyo and China’s resource grab

Dambisa Moyo is an international economist who writes on the macroeconomy and global affairs and has recently published the book “Winner Take All: China’s Race for Resources and What It Means for the World”. I had the privilege to listen to Dambisa Moyo talk at the Tutor2u conference in June this year.

So, how is China’s approach to securing resources different from its western counterparts:

1. China has befriended countries that are in the axis of the unloved. These countries have largely been ignored by major western economies includes countries in Africa, South America and Eastern Europe. A number of these countries have natural resources.

2. They have spent huge amounts of money on securing these resources and to some people they are paying too high a price.

3. They are a price setter for many resources like coal and copper. It is the main buyer so is able to influence the price it pays for natural resources.

Below is an interview with CNN.

Emerging markets to power global growth

HSBC produced a very good report in which it seeked to identify the Top 100 economies by size. The ranking is based on an economy’s current level of development and the factors that will determine whether it has the potential to catch up with more developed nations. These fundamentals include current income per capita, rule of law, democracy, education levels and demographic change, allowing us to project forward GDP to 2050. They came up with the following findings:

1. The striking rise of the Philippines, which is set to become the world’s sixteenth-largest economy, up 27 places from today.

2. Peru could sustain average growth of 5.5% for four decades and jump 20 places to twenty-sixth. Chile is another star performer in Latin America.

3. Massive demographic change: in 2050 there will be almost as many people in Nigeria as in the United States, and Ethiopia will have twice as many people as projected in the UK or Germany. The population of many African countries will double. Pakistan will have the sixth-largest population in the world. Even if some of these countries remain relatively poor on a per-capita basis, they could see a dramatic increase in the size of their economies thanks to population growth.

4. By contrast, the Japanese working population looks set to contract by 37% and the Russian one by 31%. The eurozone faces similar problems with working population declines of 29% in Germany, 24% in Portugal, 23% in Italy and 11% in Spain, adding a whole new perspective to the sovereign debt crisis.

5. It is not just about population. Ukraine is set to jump 19 places to fortieth because of its education system and rule of law, even though its population is set to fall to 36m from 45m.

6. We divide the Top 100 into three categories: 1) fast growth – with expected average annual growth of more than 5%; 2) growth – with expected annual growth of between 3% and 5%; and 3) stable – those countries expected to expand less than 3% a year.

7. We identify 26 fast-growth countries. They share a very low level of development but have made great progress in improving fundamentals. As they open themselves to the technology available elsewhere, they should enjoy many years of ‘copy and paste’ growth ahead. Besides China, India, the Philippines and Malaysia, this category includes Bangladesh, the central Asian countries of Uzbekistan, Kazakhstan and Turkmenistan, Peru and Ecuador in Latin America, and Egypt and Jordan in the Middle East.

8. The growth category extends to 43 countries. It includes 11 Latin American countries such as Brazil, Argentina, Chile, El Salvador, Costa Rica and the Dominican Republic; Turkey, Romania and the Czech Republic in central and eastern Europe; as well as the war-ravaged Iraq and Yemen.

9. Africa will finally start to emerge from economic obscurity. Five of our fast-growth countries come from Sub-Saharan Africa and three are in the growth category.

10. Most of the economies in our ‘stable’ group are in the developed world. The West is not getting poorer, but high levels of income per capita and weak demographics will limit growth. It is the small-population, ageing economies in Europe that are the big relative losers, seeing the biggest moves down the table.

11. Our Top 30 list changes slightly. Our forecasts for the countries considered in the original document have not changed, but after expanding the pool of countries considered, Peru, the Philippines and Pakistan leapfrog into the Top 30. Pakistan makes it into the top league, less because of individual prosperity, than because of population size.

12.This research strengthens the conclusions of the original report, which found that 19 of the top 30 economies will be countries that are currently ‘emerging’. Our update shows that it is not just the likes of China and India that will be powering global growth over the next four decades. Countries as varied as Nigeria, Peru and the Philippines will also be playing a significant part.

A2 – Development Economics: District Economic Development Strategies

Here is the first of a four part documentary that showcases the District Economic Development Strategies for the cities of Multan and Bahawalpur in Pakistan, developed by the USAID FIRMS Project. It highlights the many sectors identified by the strategies and presents a roadmap which, when implemented, can open up new avenues of economic growth and prosperity for these districts. While bringing out the crux of the strategies — the tremendous potential of the region — the documentary touches upon each individual sector, highlighting its advantages. In doing so, it reveals the untapped potential for economic opportunities and presents the two districts as being poised on the brink of a journey to progress and development, where the possibilities are endless and the destinations, unlimited!

China has plenty of ammunition to stimulte growth

With industrial production down and significantly less pressure on inflation the Chinese authorities are in a good position to throw some more fuel on the fire. The National Australia Bank reported that China’s Industrial Production for July rising by 9.2%yoy, down from 9.5% last month and below the median forecast of 9.7% – see graph below.

However this growth is not bad when you think of other primary producing countries. Furthermore the CPI rose by only 1.8% this year (July yoy) and down from 6.5% in 2011 so there is little pressure in this area.

The worry for China is their trade balance which has dipped. This was very disappointing export growth coming in with a rise of 1% over the past year, down from 11.3% last month and way below the median forecast of 8.0%. There was a big fall in exports to Europe, down by 16.2% over the past year (-1.1% in June). Exports to Italy are down by 35.8%. There was also a significant pull back in exports to the USA rising by 0.6%, down from 10.6% in June. Exports to the rest of Asia were better but have slowed everywhere. For Australia, exports rose by 8.5% yoy, down from 18.6% yoy last month. Meanwhile, imports slowed to 4.7%, from 6.3% last month and below the market forecast of 7%. Imports from Australia into China fell by 9.7%yoy, down from a rise of 1.7% for June.

A2 – Developing Economies and the Global Financial Crisis.

Just completing the Unit 6 of the A2 course and updating my notes on the current issue of debt hangover from the Global Financial Crisis. The FT recently reported that there are worrying signs of private sector credit in emerging economies.

Turkey Brazil Russia - private sector credit in year to April 2012 up 20%.
China – private sector credit in year to April 2012 up 15%.
Poland – private sector credit to GDP 49%

This is seen as inevitable if an economy is going to grow but there needs to be investment in capital which will ultimately increase a country’s productive capacity and long-term development. However a lot of this borrowing has gone into consumer goods rather than capital infrastructure projects. This is especially worrying in Brazil as the transport system needs a major overhaul if it is going to cope with the demands of the Olympic Games in 2016. According to the FT misdirected credit can produce two damaging consequences:

1. When too much money is directed into the housing market bubbles can occur – subprime for instance and more recently China.
2. Poor credit allocation can harm economic growth, both in the short and in the long term.

Although China and Brazil has loosened monetary policy this needs to be accompanied by a process that ensures it is directed to where it is most needed. Jeffrey Sachs in his book “End of Poverty” talked about how a country needs six major kinds of capital:

1. Human capital: health, nutrition, and skills needed for each person to be economically productive

2. Business capital: the machinery, facilities, motorized transport used in agriculture, industry, and services

3. Infrastructure: roads, power, water and sanitation, airports and seaports, and telecommunications systems, that are critical in-puts into business productivity

4. Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems that provide the environmental services needed by human society

5. Public institutional capital: the commercial law, judicial systems, government services and policing that underpin the peaceful and prosperous division of labor

6. Knowledge capital: the scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital

Figure 1 shows the basic mechanics of saving, capital accumulation, and growth. We start on the left-hand side with a typical household. The household divides its income into consumption, taxation, and household savings. The government, in turn, divides its tax revenues into current spending and government investment. The economy’s capital stock is raised by both household savings and by government investment. A higher capital stock leads to economic growth, which in turn raises household income through the feedback arrow from growth to income. We show in the figure that population growth and depreciation also negatively affect the accumulation of capital. In a “normal” economy, things proceed smoothly toward rising incomes, as household savings and government investments are able to keep ahead of depreciation and population growth.
Source: The End of Poverty: How we can make it happen in our lifetime by Jeffrey Sachs (2005).

China’s mining issues in Australia

For many years China has been trying to guarantee resources for its growing economy. The FT in London recently looked at the Chinese mining company Citic Pacific which has invested huge funds into the Sino Iron mine in Western Australia. Originally hatched in 2006 the level of expenditure has gone significantly higher than expected – from US$2bn to US$7.1bn today. However some have suggested that a US$10bn will ultimately be the cost and this is especially prevalent in that they are two years behind schedule.

It seems that Citic Pacific have put down too much money to pull out – barriers to exit. China imports about 60% of its iron ore and the Sino Iron mine is an attempt by the Chinese to break away from the dependency of foreign suppliers, which Chinese steelmakers accuse of driving prices too high. However Chinese companies have found it difficult to adjust to the foreign working conditions compared to the protected environment in China. Chinese enterprises are often unprepared for the rigours of foreign competitors especially with regard to employment laws and the nature of contracts. China’s mining plans involve the use of Chinese labour as they are cheaper and have a higher productivity. However, overseas labour laws and visa requirements make the use of Chinese labour all but impossible. In Australia truck drivers can earn US$2000,000 a year with three-home housing, free home leave. By seeking control negotiations can become confrontational.

The Chinese were desperate for iron ore when the demand for steel was very high. However Chinese developers realise now that the demand for steel has dropped and prices have fallen. In 2010 China imported less iron ore than the previous year and by 2011, higher interest rates and strict restrictions on property and construction continued to put downward pressure on steel prices. Also for Citic Pacific miscalculations over currency have played a role in increasing costs. The AUS$ has appreciated over the life of the project and controversial hedges that Citic bought went wrong causing a $2bn loss.

Yesterday official GDP figures out of China showed that growth has slowed to 7.6% for the second quarter. This was predicted but as building and infrastructure development accounts for 55% of China’s GDP growth this has a significant impact on demand for iron ore which is a key ingredient in steel.