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China UpdateI was in Bali last few days and just returned to Singapore. This update from Na Liu was published on Thrusday October 15th.
Macro – Post-Holiday Market and Data September Macro Data Supportive ■ On the monetary side,
growth of ■ On the trade side, exports
in September fell 15.2% YOY, beating economists’ consensus of 21%, while
imports fell just 3.5% YOY, well short of
expectations of a 15.3% decline. We note that the improvement in the external
demand for Chinese goods is an encouraging development both for the Chinese economy
and the world economy. In fact, in some major export hubs, some major
industrial bases, and some big cities, a general labour shortage has manifested
itself, which is, in our opinion, a result of stronger export order flows and
still-strong general construction activities. ■ Separately, official data
shows that September Commodities Imports Very Strong ■ In September, iron ore
arrivals set a new monthly record of 64.6 million tonnes, up 30% MOM; and
copper (unwrought and semis) imports jumped 23% MOM to 399,052 tonnes, reversing
a two-month sequential drop. We note that before the data release, both iron
ore and copper imports were expected to drop on a MOM basis, so the actual
imports data were surprising on the high side and supportive for our bullish
view on both commodities. We also note that in the first two weeks of October,
Chinese spot purchase of iron ore remained active, as spot vessel bookings to ■ Last month, crude imports
rose 14% YOY to 17.2 million tonnes or 4.197 million barrels per day (bpd), but
eased from peak rates in the previous few months, which have boosted domestic
crude stocks to record highs. Back in August, Chinese crude imports were 4.36 million
bpd, and in July Chinese crude imports set a record high of 4.64 million bpd.
On the products side, we calculated that Post-Holiday Market Behaviour ■ After the October “Golden
Week” holiday, an eight-day-long holiday from October 1 to October 8, the
initial direction of Chinese local commodities markets is disappointing for the
bulls. Steel prices continued to slip (Exhibit 2) and sentiment was hurt by the
sluggish home sales in the Golden Week (see next section). Average rebar price
and hot rolled sheet prices dropped 2%-3% versus the levels seen on September
28. Iron ore and coke prices were largely flat. On the base metals side,
although the local market rose sharply to catch up to the strong move on the LME
in the holiday week, the underperformed
the LME market. On the chemicals market, ethylene and methanol prices were flat
to lower. The only bright spot is the coal price, which inched higher
post-holiday at Qinghuandao port by about RMB5-RMB10/tonne. ■ We note that the sluggish
performance in Chinese commodities markets is more a result of amply supply
driven by record levels of imports and output than any visible slowdown in
demand. In addition to the strong copper and iron ore imports discussed above,
we note that in September, Chinese steel
output was likely to set another record, according to the China Iron and Steel
Association. Because of high output, local steel inventory surpassed the
previous peak in March and now reached the highest level this year. Consumer Behaviour During Golden Week ■ Consumer behaviour during
the Golden Week holiday is considered a very good barometer of Chinese consumer
confidence for the rest of the year. Initial data showed that sales were very
strong during the past Golden Week for almost everything, except for home
sales. ■ During the eight-day-long
national holiday, nation-wide retail sales were up 18% YOY to RMB570 billion.
Sales were particularly strong in the area of home appliances, electronic devices,
communication devices, jewellery, and autos. Car sales were up about 71.7% YOY in
key sampling markets. Quite a few models were reportedly sold out. ■ The first week of October
has been known as the “Golden Week of the Year” for home sales in the past
several years. But sales in this year’s Golden Week were disappointing, at
least in first-tier cities. In major cities such as down
significantly (over 30% YOY) on both a sequential and YOY basis. ■ We note that the downtrend
in home sales, which started in September, has been accompanied by a spike in
home prices. This unique combination made industry insiders divided on how to
interpret the sales slowdown. The pessimistic view is that the pent-up demand
accumulated in the previous sales downturn has been released and exhausted in
the past eight months, and now the sharply higher housing prices are beginning
to inhibit demand.
The optimists believe that the slowdown in sales has occurred simply because existing
inventory has drawn down to very low levels after months of supercharged sales and,
as a result, developers are raising prices sharply to curb the pace of sales to
maintain a minimum inventory. Optimists also tend to point out that the slower
home sales were only visible in first-tier cities, but in second-tier cities,
home sales are still accelerating. After talking to our local contacts, we
believe that both views have merit, but the optimists’ opinion has more. We
will be more comfortable with the optimistic view if we find September
construction data continues to surge. Indeed, if the developers are worrying
about inventory levels, as they have said they do, then they should begin to
accelerate home construction. And home construction levels are what really
matters for Chinese raw materials demand. September construction data is due in
the next few days. Overall Comments ■ The September trade and
monetary data and the post-holiday market and consumer behaviours support our
investment stance of “less bullish but definitely not bearish.” In essence, the
underlying Chinese economy remains sound, and the recovery is intact. That said,
the Chinese economy is still not strong enough to support/digest the record
high output and import levels for key commodities so far this year. Inventory
levels for key commodities are now on the high side and the local markets are
comfortably supplied, and as a result, commodities prices are under slight
pressure in ■ To make us more bullish on
the raw materials sectors from a Grain –
Stockpiling to Continue Reserve Level
High ■ The actual level of China’s
grain reserves nearly matches reported levels, China’s top state planning body
said late last week, giving the conclusion of a four-month investigation into grain
stocks at state warehouses. By the end of March, state-owned warehouses held
grain reserves totalling 225.4 million tonnes, which was 99.7% of the reported
level, the National Development and Reform Commission (NDRC) said. stated,
or empty. ■ We note that the disclosed
stock number, at 225.4 million tonnes, which did not include weekly sales by
the government in the past five months, was larger than an earlier figure of between
150 million and 200 million tonnes announced by Premier Wen Jiabao last year. ■ The NDRC also said in its
statement that half of the stocks came from last year’s harvest. China has
stockpiled the highest-ever quantity of grains, including rice, wheat, corn,
and soybeans, since late last year to help boost farmers’ incomes after a
record harvest of 528.5 million tonnes and weak demand from processors and feed
mills. Stockpiling to
Continue ■ For this year’s harvest,
Singrain, the government buying agency, said it had bought 2.677 million tonnes
of early rice and 39.99 million tonnes of wheat by September 25. Although purchases
of corn and soybeans have not started for this year’s harvest, the central government
just pledged earlier this week to extend its soybean and corn stockpiling
scheme to this year’s new crop. The new crop harvest is due to begin within
weeks. ■ Traders said the government
was likely to offer prices higher than last year, when the government bought
more than 6 million tonnes of soybeans at RMB3,700 per tonne and 36 million
tonnes of corn at RMB1,500 per tonne for state reserves. ■ We note that the government
stockpiling is a double-edged sword for global grain prices. In a year of
bumper harvests, like this year, the stockpiling will keep the local Chinese
price high and offer a support for global pricing from a News in Brief ■ ■ Deng also said CISA, which
represents a majority of big state-owned steel makers in China, will lead the
next round of price negotiations and will push for a “China-specific price” to replace
the old system of uniform pricing for all buyers. “ ■ Speaking at the World Steel
Forum in Steel –
Baosteel Cut November Prices ■ Steel – Efforts
to Reduce Capacity ■ Frustrated in previous
attempts to consolidate its fragmented steel industry, ■ Under a plan being worked
out, steelmakers’ national tax bills would decline by year-end, with some of
that money instead going to regional taxes. That would soften the blow of mill closures
by giving regional governments additional tax revenue to stimulate their
economies and help find jobs for displaced steelworkers. The lower tax burden
would also leave steelmakers with more cash for acquisitions. ■ Re-Cap of Our
Calls ■ Essentially, we are making
four calls in our China Commodities Weekly: economic trends in ■ Economic trends: There are three intertwined
trends for the Chinese economy – seasonal (the current and next few months),
cyclical (the current and next few years), and secular (the current and next
few decades). We are currently a seasonal bull, a cyclical bear, and a secular bull. ■ Overall sector call: Our overall sector call is
to answer one question: purely from a ■ Individual commodity
sectors: On
individual commodity sectors, we are now positive onthe copper, steel, iron
ore, coking coal, uranium, molybdenum, corn, DAP, and hardwood pulp sectors. We
are neutral on aluminum, zinc, nickel, thermal coal, potash, urea, wheat, soybean,
methanol, ethylene, and crude oil. We are cautious on paper products. Please
note that our positive, neutral, or cautious views on individual commodity
sectors are all on a relative basis from a ■ Views on annual
contract negotiations: We are looking for a 7.5% rise in the 2010 annual iron ore
contract. We expect the 2010 benchmark Australian hard coking coal price to
settle at US$160/tonne, up from US$129/tonne in 2009. We expect the 2010 |
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Msg # | Subject | Author | Recs | Date Posted |
61738 | Re: China Update | Riddellfool | 1 | 10/17/2009 10:37:02 PM |