The level of debt held by mid-tier mining companies and whether they could service it was the next concern facing an already struggling commodity sector, Craigs Investment Partners broker Peter McIntyre said yesterday.
The ongoing turmoil in the Chinese economy meant some of the smaller mining companies would start feeling the pressure of repaying debt from a diminishing cash flow.
Already, some companies had stopped paying dividends, he said.
It was possible the situation could herald the start of a merger and acquisition season as larger and cash-rich companies bought up struggling smaller entities cheaply.
The ASX opened up sharply lower yesterday on continued worries about the Chinese economy and whether the Government would again intervene in the markets of the currency.
"As the US dollar strengthens, companies start to struggle with the level of debt they have and their ability to repay. As oil reaches multi-decades low prices, risks of defaults on debt issued on the US market rise.
"If you look at the Standard & Poor's 500, it was down for the year, but some sectors performed well. Those holding commodities saw all of their value thrown out the window.''
As far back as August last year, Mr McIntyre was predicting China would allow its yuan to depreciate under the guise of market reform, intervening in foreign exchange markets to manage the decline.
"China's move to devalue the yuan is an incremental negative for emerging markets and Asia in particular. Emerging economies were fragile prior to this move and are not well positioned to deal with this incremental shock.''
Further weakness in emerging-market currencies and share prices was expected, he said.
China's consumer inflation barely edged up in December while companies' factory-gate prices continued to fall, adding to concerns about growing deflation risks in the world's second-largest economy.
In line with sluggish activity, China's consumer inflation quickened slightly to 1.6% year-on-year in December, as expected, compared with 1.5% the previous month.
The producer price index was unchanged at -5.9% in December, the National Bureau of Statistics said on Saturday, slightly above forecasts but marking a 46th straight month of declines and highlighting the deeply entrenched pressures facing China's manufacturers as the economy cools.
"The inflation profile remains soft and the continuous PPI deflation suggests that Chinese companies will have to reduce their debt as further expansion in many industries will only lead to more loss,'' Zhou Hao, of Commerzbank in Singapore, wrote in a market note.
An official survey last week showed China's manufacturing sector contracted for a fifth straight month in December and factories continued to shed jobs, dampening hopes that the economy would enter 2016 on a steadier footing.
China Beige Book International (CBB) said in its latest private survey that growth in input prices and sales prices for Chinese firms slipped to record lows in the fourth quarter.
"For the first time, it looked like firms were encountering genuinely harmful deflation,'' the private survey said.
That opinion was echoed by other economists.
Mr McIntyre said the risk of entrenched deflation was a nightmare for China. Deflationary cycles encouraged consumers to hold off from buying and businesses to hold off from investing indefinitely, on expectations prices would continue falling.
Such cycles can prove extremely difficult to escape, and Chinese policy-makers had kept a worried eye on the example of Japan, where a strong currency, distorted banking sector and muddled monetary policy combined to suppress growth for decades, he said.
