No wonder BHP Billiton yesterday canned the huge Olympic Dam expansion. It’s the slide in Asia and Europe that’s causing the hurt. That’s taking more than $13 billion out of the resource investment pipeline. The $20 billion port expansion at Port Hedland is also being delayed (if not put on ice for several years).

Some will claim this reflects an investor rush for the exits (cue whingeing about productivity, “high cost economy”, etc). But overall investment levels remain far above historical records. And the cancellation of some more marginal projects will take some pressure off wages and material costs as more companies rush for the exits, all while nervously watching the darkening clouds over the economies of China and the rest of Asia.

As for Tony Abbott, who blamed the carbon and mining taxes for the Olympic Dam decision without even reading what BHP had to say — indeed, he appeared to suggest Marius Kloppers had deliberately misled investors — he should pay attention. This has potential significance for the economy he thinks he’ll inherit.

There are a couple of other areas to watch for more delays or cancellations: the marginal coal projects in Queensland’s Galilee Basin where Gina Rinehart and Clive Palmer are promoting multi-billion dollar investments, Ms Rinehart’s Roy hill iron ore project in WA, which is under rising financing pressures and LNG projects in Queensland where there seems to be one or too too small and too costly.

If China’s economic slowdown turns into a crunch, then this story from Marketwatch.com, and this one from the Financial Times overnight contain the reason. Put simply, too many goods are chasing too little demand and has produced overstocked businesses, from homes, to steel, coal, sportswear, cars and beyond. It’s all part of China’s own structural readjustment (Australia’s is in response to the high dollar) as it slows from 10% or more annual growth to a target of 7% to 8%.

Later today (just after Crikey is published) and tonight market confidence Europe will be put to the test when the “flash” reports on the performance of the manufacturing sectors of China, France, Germany and the eurozone as a whole are released. Another weak report, especially for China, will see markets sell off.

US conditions remain betwixt and between. Sharemarkets in the US hit four year highs on Tuesday and remain confident. But the Fed’s view of the US economy from the minutes of the latest meeting (released early today) showed a lot of talk about another round of easing. But that was before a spate of better-than-expected data.

In China, steel is the big focus and a Reuters report Wednesday that Chinese steel mills have decided to default or defer shipment of up to 4 million tonnes of iron ore because the spot price has fallen sharply added to the sense of unease overnight. It was the second such report in 11 weeks. In early June there were reports that Chinese buyers of iron ore and coal were defaulting on import contracts. The reasons were falling prices for the commodities, for steel products in China and rising stocks of unsold products. The Platts reporting agency said spot cargoes of 62% ore for delivery in northern China were priced at $US105.50 a tonne, down 30% since April.

There are reports of thousands of items produced in China in huge quantities, or the imported commodities used to make them, are being stockpiled because of weakening demand. China’s power production and consumption has also slowed in recent months. That in turns helps explain why stocks of coal across China (at ports, power stations, mines, steel mills and at storage area) are up a reported 50% in a year to the highest level for four years and prices are off 20%. China’s biggest ship builder, Rongsheng Heavy Industries saw its net profit for the first half of the year fell 82%. It said it received new ship orders to the value of just $US58 million in the six months to June, down from more than $US700 million in the first half of 2011.

Although there are hopes the overstocking has peaked, there is a danger it could wreak havoc on sales of a host of goods, from machines, to commodities, food and the like. That will in turn cascade down the line to supplies of commodities from Australia, Canada and Brazil.

The problem is already hitting demand outside China. Japan reported a 11.9% fall in exports to China, its biggest market, in July. Japanese exports to the US rose marginally, indicating demand there is stronger than from China. But some Japanese economists warn the chances of a slide into negative growth this quarter for our second-biggest export market is rising because of the weakness in exports. Imports were up by just over 2%, thanks to higher imports of LNG for power generation as most of Japan’s nuclear power stations remain offline (which in turn has helped drive the price of uranium down a quarter since Fukushima).

Other exporters aren’t performing well either. Exports from Taiwan fell for a fifth straight month in July; South Korea saw its sharpest fall in exports in July in nearly three years. And in the first 20 days of this month, South Korea’s exports fell 12.4%. And China’s own exports to Europe plunged a shock 25% in July. No wonder the RBA has the euro crisis on the top of its list of threats to the Australian economy.

The possibility that falling export prices will see our terms of trade weaken further into next year, was behind Deutsche Bank’s forecast this week that we could slip into a recession in 2013. Chinese steel producers lifted production  in the first 10 days of this month when they were supposed to be cutting it, according to figures from the country’s steel industry association. That’s a big worry because it shows they are not responding to the slump in product prices and the oversupply, but running their mills just to keep some cash coming in the door. There could be a sudden crunch being in steel and production plunges to adjust to lower demand and overstocking, which would not welcome news for Australia, the budget, the RBA, or the economy generally.

It’s the sort of global environment that will make more marginal big-ticket mining projects or expansions harder and harder to justify in an economy already facing capacity constraints and skill shortages on top of an apparently bullet-proof currency. Throw in that, like uranium, the price of copper is down a quarter since its 2011 peak and that Marius Kloppers is still smarting from his US shale gas debacle, and the question becomes more why BHP waited so long to indicate it couldn’t make a go of the expansion under present conditions.