Recent trade data illustrate a near-collapse in Asian exports to the European Union which, if it continues to accelerate, would signal the end of the mining supercycle.
Over the past decade, Canadian mining stocks have closely tracked the path of Asian export data, highlighting the importance of Asian manufacturing growth on demand for base metals.
The incredibly sharp decline in exports from South Korea and China to Europe suggest a dire outlook for Canadian mining stocks and sustained selling pressure in the sector.
"Asia's export growth to the E.U. fell from –5.0 per cent in June to –15.6 per cent in July, and the trajectory is becoming as steep as during the global financial crisis" writes Nomura economist Rob Subbaraman.
South Korea is the only Asian country to release trade data for August and the results are alarming. Exports to the euro zone cratered 50 per cent year over year and 45 per cent month over month. An abrupt halt to demand from the euro zone, which remains the world's largest trading block by gross domestic product, has caused a major decline in intra-Asian trade, highlighted by declining shipments between South Korea and China.
The pace of trade within Asia, which is an indication of manufacturing growth in the region, has provided an effective leading indicator for the global economy and for Canadian mining stocks. (See this infographic)
The South Korean economy is trade-oriented and has offered an accurate window into changes in the level of economic activity throughout Asia. Importantly, there are few concerns regarding government manipulation of economic reports.
Domestic mining stocks have effectively predicted the weak export data now being released in Asia, trading a gut-wrenching 46 per cent lower in 2012 ahead of the release of the actual numbers.
At this point, stocks may have priced in the new global economic reality but the potential for an acceleration of the downturn has analysts concerned.
For Mr. Subbaraman. it is the speed of the decline that is now the primary issue. "Without stepping up policy easing, risks are building that Asia's deepening export downturn will start to have serious multiplier effects," he writes, suggesting that Asian and European central banks must act soon to prevent a downward spiral in broader Asian economic activity.
Scott Barlow