Recent data continue to suggest that the Chinese economy–which for all its gains during the last decade is still ascending toward its full potential–is slowing.

The HSBC Flash China Manufacturing PMI–an estimate based on approximately 85 percent to 90 percent of total survey responses designed to give a read on final data–declined to 48.1 in June from 48.4 in May. This is a seven-month low, and the most recent reading above 50 was in July 2011.

This slide from above 50–the standard bright line separating “expansion” from “contraction” for purchasing managers indices around the world–still isn’t as steep as the one in response to the Great Financial Crisis (GFC), when this early and unofficial read on manufacturing activity in the Middle Kingdom sank from 53.3 in July 2008 to 41.8 in November 2008.

But the headline figure released Thursday, Jun. 21, in Hong Kong was backed by internal data that provided little room for optimism: New orders and new export orders are contracting at faster rates, while inventory of finished goods are expanding at a faster rate. However, employment, stocks of purchases and quantity of purchases are contracting but at slower rates.

China’s policymakers have already taken steps to counter this slowdown, which include subsidies for purchases of household appliances, new support for seven industries, including new energy and environmental protection, a significant uptick in approvals for new investment projects, easing of capital requirements for banks and a People’s Bank of China interest rate cut.

But the Flash PMI data, coupled with the sharp decline in May inflation, suggest more will be done. We won’t see anything like what Chinese policymakers unleashed four years ago, but there’s a compelling state interest in maintaining social order through employment, particularly as China approaches a leadership changeover that presents its own possibilities for destabilization.

It’s against this backdrop and into the headwinds emanating from Europe that Australian Edge Portfolio Aggressive Holding Rio Tinto Ltd (ASX: RIO, NYSE: RIO) this week held to its projection that Chinese steel production will grow at a pace that gets the Middle Kingdom toward 1 billion metric tons of output by 2030 from a current level of about 700 million.

This long-term forecast is supported by internal Rio Tinto analysis that finds China’s steel stock “is currently well behind other economies,” including the US, Germany, Japan and South Korea, that enjoyed periods of rapid development during mostly the 20th century but for the first part of the 21st as well.

Total Chinese steel demand during the 20-year period from 1990 to 2010, for example, was but a fraction–less than a third–of that from Korea during the same timeframe. It was less than half of that of the US from 1960 to 1980 and of Germany from 1970 to 1990, roughly a third of that of Japan from 1980 to 2000.

Total steel demand China will approximate what Japan experienced from 1980 to 2000, at roughly 12.5 metric tons per capita.

From 2000 to 2010 the compound average annual growth rate of Chinese steel production was 18 percent. Rio Tinto analysis indicates this rate will slow to 4 percent for the 2010-to-2020 period and to 1 percent for 2020 through 2030 before declining by an average of 1 percent the ensuing decade as the pace of the Middle Kingdom’s urbanization levels off.

Still, over the next two decades, as the migration of rural populations to large coastal cities continues apace, more steel will be produced, as Rio Tinto research shows that a Chinese urban household has 10 to 15 times more steel intensity than a rural household, based on general infrastructure requirements, changing employment environments and increased use of automobiles as well as different types of housing and rising use of more sophisticated household appliances.

This is a long-term story, but foundations have been laid and current efforts are focused on maintaining the necessary build-out of infrastructure. Producers of long steel products such as reinforcing bars, wire rod and structural sections will get a boost from larger-scale infrastructure projects; output of long products actually rose in the first quarter 2012 by 8 percent compared to the first quarter of 2011.

And subsidies for more efficient home appliances should boost consumption of flat steel products; this sector of the industry was reporting steadily rising output and demand, mainly for cold-rolled and zinc-coated sheet for sale to the automotive sector. Domestic consumption of these products should improve significantly later this year.

These are the short-term contours of the longer-term urbanization trend that’s prompted Rio Tinto to lay another USD4.2 billion bet on the development of its iron ore business. On Jun. 20 management announced that it would invest USD3.7 billion to expand its Pilbara iron ore operations in Western Australia and USD501 million in additional infrastructure at the Simandou iron ore project in Guinea.

According to CEO Tom Albanese Rio is “directing investment to projects that will generate the most attractive returns for shareholders and are resilient under any probable macroeconomic scenario.” Rio’s Pilbara operation boasts some of the best profit margins in the iron ore industry, with low capital costs relative to output, and the company has an enviable track record of finishing projects it starts when it says it will and in line with cost estimates.

In other words, this is money highly likely to be well spent, particularly in light of recent difficulties experienced by competitors at delayed or postponed iron ore projects. Demand from a game-changing consumer will continue to rise, though supply looks to be constrained.

Work on the Pilbara expansion is already well underway and will benefit from an existing export facility proximate to the key destination. The new Simandou effort will get Rio Tinto closer to exploiting a new, world-class iron ore resource that to a limited degree depends on the Government of Guinea finalizing a financing strategy and granting approvals for the development of port and rail facilities.

The overall USD4.2 billion will cover the expansion of Pilbara to production of 353 million metric tons per annum by 2015 and to complete port and rail facilities. Of the USD3.5 billion allocated for this segment of Rio’s iron ore commitment USD2.9 billion will be spent to add two berths on the new Cape Lambert jetty and wharf, to replace the existing original Cape Lambert rail car dumper and for expansion of overall rail capacity, including new track and rolling stock improvements. About USD570 million will be spent on a new gas-fired power station at Cape Lambert, which will be more energy efficient and will result in a significant reduction in carbon emissions.

The total outlay also includes USD1.7 billion of largely sustaining capital expenditure to extend the life of the Yandicoogina mine in the Pilbara to 2021 and to expand its nameplate capacity from 52 metric tons per annum to 56. Rio will also build a wet processing plant to maintain product specification levels and provide a platform for future potential expansion. The key component of the project–the expansion of mine production capacity–depends on the approval of the West Australian state government as well as by participating joint-venture partners.

Simandou, meanwhile, will see USD501 million spent on design studies, early works and long-lead items, primarily for rail and port infrastructure. First commercial production from the project is anticipated by mid-2015. Rio Tinto expects Simandou to “become a long-life, low-cost operation producing one of the highest grade iron ores on the market.”

Rio Tinto hit a pre-GFC high of AUD123.12 on the Australian Securities Exchange (ASX) on May 19, 2008, while the company’s New York Stock Exchange-traded American Depositary Receipt (ADR), which is worth one ASX-listed share, hit USD138.73 in mid-May 2008.

The stock bottomed around AUD25 in early December 2008 Down Under and closed as low as USD16.23 on the NYSE on Dec. 5, 2008. A little less than a year it was a AUD70 stock on the NYSE, AUD80 on the ASX.

Extreme pessimism triggered first last summer by fears brought about by Standard & Poor’s rash downgrade of US credit and exacerbated in ensuing months as the very real sovereign debt crisis in Europe has deepened has taken it to new near-term lows, despite the fact that the company boosted the dividend significantly from fiscal 2011 to fiscal 2012 and will pay an estimated USD1.60 per share.

The payout ratio for the most recently reported period was 46.6 percent, while debt-to-assets is just 18.2 percent. Rio Tinto continues to generate significant cash flow from its diverse global mining operations and is well positioned to maintain and grow its dividend, satisfy its debt obligations, which are comparatively light until 2015, and invest in its key long-term projects.

Analysts who cover Rio Tinto seem rather compelled by this line of thinking; 14 rate the stock a “buy” according to Bloomberg’s standardized format for brokerage-house recommendation language, while zero rate it a “hold” and one says “sell.”

Rio Tinto did cut its dividend during the depths of the GFC, and it is exposed to the vicissitudes of commodity-price swings. But its other attributes are enough to earn it a “4” according to the Australian Edge Safety Rating System. This factor, combined with the recent steep price decline as well as short-term stimulus to come and long-term dynamics to play out in China suggest we have a solid buying opportunity at these levels.

The Roundup

Australian stocks experienced a rather jagged week, rising on optimism raised by a favorable outcome from a eurozone-preservation perspective to Greek elections, falling later in the week as data from China disappointed.

The Australian dollar is back above parity, however, as anticipation of further stimulus efforts, particularly from the US Federal Reserve, which this week extended its “Operation Twist” program to swap short- for long-dated US Treasury bonds in an effort to suppress interest rates through the end of 2012. The Fed also laid the groundwork for another round of quantitative easing should circumstances dictate more monetary stimulus when it meets in August.

The aussie, along with its Commonwealth Cousin currency the Canadian dollar, has rebounded sharply in June from the 2012 lows both “harder” currencies plumbed in May. And it remains the case that both have maintained a more significant part of the value they earned during the last decade’s run-up for commodities, driven by China.

But when the market’s fears about global growth wax, the aussie and the loonie will suffer. The suggestion of  more expansive monetary policy from the less fundamentally sound developed economies will from time to time provide further uplift, and if these efforts succeed in eventually reviving global growth both should move well past and remain above parity with the US dollar.

This outlook, in fact, forms part of our long-term thesis for Australian Edge as well as its sister letter Canadian Edge, that the relative strengths of the respective underlying economies will give a currency boost for US-based investors focused on high-quality companies and collecting the sustainable dividends they pay.

News from Portfolio Holdings this week is as follows.

APA Group (ASX: APA, OTC: APAJF), Australia’s largest natural gas infrastructure business, priced a CAD300 million (AUD289.5 million) issue of seven-year fixed-rate medium-term notes with a coupon rate of 4.245 percent. Proceeds will be used to repay existing loans drawn under APA’s current revolving bank facilities, with excess available to support ongoing investment in the growth of its infrastructure assets, including the acquisition of Hastings Diversified Utilities Fund (ASX: HDF), and for general corporate purposes.

This is APA’s first foray into the Canadian debt market and is a direct effort to satisfy interest from investors in the Great White North, as the company’s invest-to-grow proposition continues to attract more and more interest around the world. Conservative Holding APA Group, an original member of the AE Portfolio, currently yields 6.9 percent and is a strong buy up to USD5.50.

Australand Property Group (ASX: ALZ, OTC: AUAOF) announced that its 2012 first-half (ending Jun. 30, 2012) distribution will be AUD0.105 per stapled security, in line with the interim dividend paid for 2011.

The record date is Jun. 29, 2012, while the shares will trade ex-dividend as of Jun. 25. The payment will be made Aug. 7, 2012. Australand Property Group is a buy under USD2.80.

Transurban Group (ASX: TCL, OTC: TRAUF) will pay a fiscal 2012 second-half distribution of AUD0.15 per share, bringing the full fiscal-year payout to AUD0.295 per share, up 9.3 percent from the AUD0.27 paid for fiscal 2011. It’s the third straight year Transurban, which owns and operates toll roads primarily in Australia with a significant US presence, has boosted its distribution.

The dividend will be paid Aug. 14, 2012, to shareholders of record as of Jun. 29, 2012. Shares will trade ex-dividend beginning Jun. 25.

Management also announced that, following completion of a review of traffic and operating forecasts for Pocahontas Parkway 895 in Richmond, Virginia, it will reduce the carrying value of the asset based on revised lower revenue forecasts. The company will book an equity accounting charge for the year ending Jun. 30, 2012, of AUD138.1 million. This writedown creates an accounting charge only; there are no cash impacts at the shareholder level.

Transurban’s investment in Pocahontas is held via Transurban DRIVe, which is 75 percent owned by Transurban. As a result of this equity accounting charge, Transurban’s carrying value of its investment in DRIVe will be reduced to zero.

Transurban made the Pocahontas investment in 2006 on the expectation of significant housing and other development along the corridor resulting in growing traffic volumes and revenues. This development hasn’t happened, due to difficulties for the local economy as well as macro factors. According to CEO Chris Lynch, “Based on revised traffic forecasts, Transurban now believes Pocahontas’ future cash flows will be significantly impaired relative to the original forecasts.”

The issues confronting Pocahontas are specific to this roadway and shouldn’t reflect on Transurban’s broader portfolio of assets. According to Mr. Lynch, “All of Transurban’s existing operating assets remain robust with strong expectations for continued growth and free cash generation.”

The crown jewel of Transurban’s US portfolio is the Capital Beltway Express Lanes project in the greater Washington, DC, area, underway on one of the busiest roadways in the country. (Global headquarters for Australian Edge’s publisher Investing Daily is located just off Interstate 495, the Capital Beltway, and we and our colleagues travel this road on a regular basis. There’s a lot of traffic, all the time.)

Unlike Pocahontas, the Capital Beltway project doesn’t rely on new development but rather is about relieving existing traffic congestion. And in any case the economy in the Washington, DC/Northern Virginia region has held up extremely well in the aftermath of the Great Financial Crisis.

Management noted as well that this announcement “has no cash impact on Transurban or security holders in fiscal 2012 or beyond.” The best evidence: the full-year distribution announcement of AUD0.29 per share.

Credit rater Fitch, meanwhile, affirmed the company’s rating and outlook at A- and “stable” following the announcement of the asset-value writedown. Transurban will provide a sales and revenue update for the June quarter on Jul. 7, 2012.

Transurban, with a current yield of 5.2 percent, is a strong buy under USD6.

Following are dates (confirmed, tentative or estimate) for each AE Portfolio Holding’s next earnings announcement. Where companies have reported recently we’ve included a link to our discussion and analysis of results.

Conservative Holdings

• AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Aug. 22, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• APA Group (ASX: APA, OTC: APAJF)–Aug. 22, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Jul. 26, 2012 (confirmed, CY/FY 2012 1H, end Jun. 30, 2012)
• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–May 2 Down Under Digest (FY 2012 first half, ended Mar. 30, 2012), Nov. 5, 2012 (estimate, FY 2012, end Sept. 30, 2012)
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Aug. 16, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Aug. 21, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Aug. 27, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Aug. 29, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Aug. 9, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• Transurban Group (ASX: TCL, OTC: TRAUF)–Aug. 7, 2012 (confirmed, FY 2012, end Jun. 30, 2012)

Aggressive Holdings

• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Aug. 22, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 23 Down Under Digest (FY 2012 first half, ended Mar. 30, 2012), Nov. 14, 2012 (estimated, FY 2012, end Sept. 30, 2012)
• Iluka Resources Ltd (ASX: ILU, OTC: ILKAF, ADR: ILKAY)–Aug. 23, 2012 (confirmed, FY 2012 1H, end Jun. 30, 2012)
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Aug. 20, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Aug. 13, 2012 (confirmed, FY 2012, end Jun. 30, 2012)
• New Hope Corp Ltd (ASX: NHC, OTC: NHPEF)–Sept. 20, 2012 (estimate, FY 2012, end Jul. 31, 2012)
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Jul. 24, 2012 (confirmed, FY 2012 1H, end Jun. 30, 2012)
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Aug. 23, 2012 (estimate, FY 2012, end Jun. 30, 2012)
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Aug. 8, 2012 (confirmed, FY 2012 1H, end Jun. 30, 2012)
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Aug. 29, 2012 (estimate, FY 2012, end Jun. 30, 2012)