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Chinese demand falls as mining exports increase

Although both imports and exports decreased for China unexpectedly in June, Australian exports are still looking strong as our largest miners ramp up production of iron ore and various other commodities.

It was expected that Chinese imports would grow by around 8% and exports would increase by around 4%, but instead, they fell by 0.7% and 3.1%, respectively. These results contributed to a 2% decline in overall trade performance for the nation when compared to June last year, highlighting the concerns surrounding the sector.

Meanwhile, however, data released by the General Administration of Customs revealed that our exports actually increased by 11.9% for the month, also compared to last year.

The problem with this scenario is that as Chinese growth and demand decrease and our exports increase, a downwards pressure is applied on the price of commodities. In the mining sector, companies can’t dictate how much they sell their products for – the sale price is completely dictated by demand and supply. With prices falling, company revenues will follow.

Although heavyweights BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) run more diversified projects than just iron ore, both have recognised the need to reduce costs and rid themselves of non-core assets in order to focus on long-term sustainability.

Similarly, Arrium (ASX: ARI) last week provided further details regarding its intentions to cut debts and increase its diversification. Formerly known as OneSteel, Arrium changed its name to reflect its intention to add copper and gold to its business. The company’s chief executive, Andrew Roberts, stated that he believes “the (Australian steel) market is at the bottom of the cycle”, although it still intends on keeping its share of the market. Like with BHP and Rio, any further falls in the Australian dollar could greatly influence the company’s revenues in a positive way.

Foolish takeaway

Iron ore prices have been increasing recently, however, analysts from the National Australia Bank believe that is due to Chinese companies restocking their inventories. They expect the price to fall further in the September quarter. In the meantime, the increases have given some much needed relief for shareholders holding onto their stocks patiently.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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