China Commodities Weekly for the Week of February
■ So far this
week, China’s base metals markets were flat, but steel prices corrected.
Chemicals, fertilizers, and grain prices were slightly firmer. Coal prices were
flat, while oil products prices dropped.
■ In this note,
on the macro side we discuss trade, property, electricity, and auto data for
January. We also discuss the underlying forces (re-stocking or real demand
pickup) for the recent commodity and freight market strength. On the
commodities side, we examine the purchase intention of 20 million tonnes of
coking coal announced by Shandong Province. We also explain why we have
upgraded our view on urea and downgraded our view on potash from a China
Macro – Re-stocking or Real Demand Pickup?
■ In the past two weeks, our
investment theme “After the Spring Festival, Play a Spring Revival” played out
to certain degree, particularly in the iron ore sector, which we upgraded in
January. To reflect the strength, the Baltic Dry Index has been moving
materially higher, and according to one of our freight market contacts, “very
few cape-size vessels are idle now; many of them, over 130, are heading to China
or waiting at Chinese ports with iron ore.”
■ The situation invites a
question: is this increased activity due to re-stocking or a pickup in real
demand in China? Our answer, based on anecdotal conversations with local
contacts, is that for the time being, it is driven more by re-stocking than by
■ That said, re-stocking
happens for a reason: producers, traders, and wholesalers do expect demand to
pick up meaningfully in the spring. As always, the market moves on higher
expectations and increased confidence. Why are traders more confident today?
Simple: the huge loan growth seen in December and January. Today’s loan growth
translates into activities in the spring. Local traders saw this every year in
the past six years, and when they heard the loan growth numbers this winter,
they re-stocked iron ore, steel, and metals in anticipation of the pickup in
construction activities in the spring funded by the loans already made.
■ But nothing
goes in a straight line. Some consolidation will occur before the market fully establishes
a new trend. The resumption of demand will come, but may come with a choppy start.
In fact, over the past three days, steel prices in China began to give back some gains
in certain regions. A “V” shape
jumpstart in demand is not likely, given the global economic environment, and a
“W” shape is probably more realistic. Therefore, we would continue to suggest
investors “buy the dips” rather than chase the momentum (easy to say, we know).
■ As a matter of
fact, although the markets have moved up on expectations, the concurrent indicators
still depict an economy in a downturn. Higher expectations for the spring are constantly
dampened by the dismal concurrent economic data, such as sharply lower exports and
imports in January. In addition, China’s auto, property, and electricity
markets still posted year over year (YOY) sales losses last month, although the
YOY losses were exaggerated by the Spring Festival, which fell in January this
year and February last year.
Trade – Sharply Lower Imports and Exports
■ China’s exports
fell 17.5% YOY in January 2009, after a 2.8% YOY drop in December 2008. Imports
plunged a massive 43.1% YOY, twice as much as December’s 21.3% YOY decline.
Both imports and exports dropped the most since 1993, when the monthly data series
the trade data might not hurt China’s GDP number as much as anticipated by economists.
China’s monthly trade surplus reached US$39.1 billion in January, just shy of November’s
record of US$40.1 billion. The pattern in the past few months continued – exports
dropped, but imports dropped even more drastically. That being said, a sharp
decline in imports does not depict a rosy picture of domestic consumption, just
as a sharp drop in exports does not depict a rosy picture of overseas
■ As for
individual commodities, China’s crude steel imports in January fell 8% YOY and 11%
month over month (MOM) to 3.02 million bpd, the lowest in 15 months. Net
imports of refined oil products also dropped 22.2% MOM and 37.6% YOY. Imports
of unwrought copper and copper semis fell 19% MOM from December’s record level
to 232,701 tonnes in January. Iron ore imports fell 5% MOM and 11% YOY in
January to 32.65 million tonnes.
■ On the export
side, China’s exports of finished steel products fell 40% MOM and 54% YOY to
only 1.91 million tonnes last month, the lowest in nearly three years. Coal
exports were also down 36.3% YOY and 18% MOM to 3.66 million tonnes in January.
■ Once again, we
caution about reading too much into the trade data in January, as the Spring Festival
fell in the month, cutting at least five working days and distorting MOM and
Auto – January Car Sales Lower
■ China’s car
sales dropped 7.76% YOY, but climbed 4.44% MOM in January to 610,600 units.
Total vehicle sales dropped 14.35% YOY and 0.83% MOM to 735,500 units in the same
China’s total vehicle sales overtook the United States in January, although
this is likely to be a very temporary phenomenon. In January, 656,976 units of
vehicles were sold in the United States, according to Autodata.
Property – Sales Drop in January
property sales have experienced a MOM slowdown in major cities in January, especially
during the Chinese New Year holiday, after a policy-driven rebound at the end
of 2008. This confirms our view that the Chinese property market has not
bottomed out yet, both in terms of sales and price.
■ MOM transaction
volumes were down 41% in Shenzhen, 28% in Guangzhou, 37% in Shanghai, 55% in
Beijing, 23% in Chongqing, and 12% in Chengdu. On YOY basis, all the above
cities posted a decline, except for Shenzhen.
Electricity – Power Output Dropped in January
■ China’s power output from
plants connected to major grids dropped 13% YOY and 9% MOM in January to 250.3
billion kWh, a fourth straight decline that was likely exaggerated by the
week-long Chinese New Year holiday.
■ Power output from thermal
plants connected to major grids was 212.5 billion kWh in January, down 17.4%
from a year earlier.
■ By January 31, the power
plants connected to major grids had 36.4 million tonnes of coal in stocks, down
7% from three weeks earlier, but the stocks were still sufficient to last 20
Coking Coal – An Intention of 20 Million
■ The Shandong Coking
Industry Association has signed an Agreement of Intention to purchase 20
million tonnes of coking coal from Swiss firms Glencore and International Metallurgical
Resources (IMR). According to the association’s website, the Agreement of Intent
was signed on January 23, 2009. The association said it represented 55 large
coking firms in the province in the deal, which would be worth US$3 billion.
■ We observe that the coastal
province of Shandong has a combined annual coking capacity of 45 million
tonnes, and needs 60 million tonnes of coking coal a year. The association said
that it signed the agreement to prepare the coking firms with sufficient raw
materials for the upcoming economic recovery. Last year, when the coking coal
market was hot, domestic coke producers suffered a significant margin squeeze
due to the high-flying domestic coking coal price. Therefore, the Agreement of
Intent might just serve as a warning to domestic coking coal suppliers of the
■ Indeed, an official at the
Shandong Coking Industry Association, who declined to be named, said that “It
is only an intention, not a firm supply contract.” However, he also said that
the 20 million tonnes would be delivered over a year, if domestic coking coal
prices surged again.
■ We believe that it is
extremely unlikely that China will import 20 million tonnes of coking coal in a
year, given the scale of the quantity. Official customs data shows that, in
2008, China imported 6.86 million tonnes of coking coal and exported 3.4
■ That said, for the time
being, domestic coking coal is trading at a slight premium to the international
spot market price, particularly in China’s coastal regions like Shandong Province.
It does make some economic sense for coastal regions to import some coking
coal, rather than to take delivery from China’s interior coal-producing
provinces. We are hearing that, just recently, a couple of shipments were
traded to China at around US$150/tonne.
■ We further note that the
Agreement of Intent implies an import price of US$150/tonne (US$3 billion for
20 million tonnes). We maintain our call for a US$130/tonne coking coal benchmark
price (FOB Australia) for the 2009 coal year.
Potash – Downgrade to Neutral
■ Last November, we upgraded
our view on the potash sector to bullish from a China perspective, due to low
expectations and “supply disciplines.” In the past two months, the market began
to buy into the idea that supply discipline will lead to a better-than-expected
China contract price, and the sector has outperformed.
■ But supply discipline has a
cost: that is, lost sales volume. We have been looking for a US$24/tonne hike
in the potash contract price in 2009. If we are right, China might take some 6
million tonnes of potash from overseas this year. Our Chemicals and Fertilizers
analyst, Sam Kanes, looks for a much higher contract price hike. If Sam is
right, China might take only 3 million tonnes of imports.
■ Last year’s potash contract
was US$576/tonne FOB, or RMB3,930/tonne. Taking freight, discharging cost, and
carry charges into consideration, a port sales price at over RMB4,500/tonne is
basically the break-even point for last year’s imports. For the time being, although
the nominal port quotation by Sinochem is still at RMB4,600/tonne, the average retail
prices have slipped to the RMB4,200/tonne range. This had made last year’s
imported material unprofitable. In this environment, it is doubtful that
Sinochem and Sino-Agri will accept any
price over US$600/tonne for the 2009 contract. If they do, they will take the
risk that farmers may refuse to pay for the high-priced materials.
■ As a result, we have
downgraded our view on the potash sector to neutral from bullish, but we
maintain our call of a US$24/tonne hike for the 2009 China potash contract.
■ On the urea and
DAP side, we are now officially in the planting season. The export tax has been
hiked to 110% for both fertilizers since February 1, 2009. With a 110% export
tax, China’s exports of urea and DAP will disappear in the next few months
(except for some 120,000 tonnes of urea that has already cleared customs to
bonded warehouses). As such, China will become a positive factor in the
global urea and DAP markets, and we have now upgraded our view on urea to
positive from neutral purely from a China perspective and we maintain our
positive view on DAP.
News in Brief
Coal – NDRC Intervenes in the Stalled Price
■ China’s top
economic planning agency has proposed a 5%-8% price increase for annual coal supply
contracts this year, the official China Securities Journal said this Tuesday.
The National Development and Reform Commission (NDRC) has submitted the
proposal to the State Council, as price talks between coal suppliers and power
generators have stalled since December, the paper quoted an unnamed source as
Macro – PBOC Not Worried by Lending Spike Yet
■ As we reported
in the past three weeks, China’s new yuan lending is expected to surge to RMB1.2
trillion-RMB1.6 trillion, When asked by media whether the rumoured RMB1.6 trillion
loan growth in January is seen as excessive, PBOC Chief Zhou Xiaochuan said lending
has been pushed up by China’s monetary stance, and further observation is
needed to make the final sum as banks take up the government’s calls to extend
loans to prop economic growth. The loan data is only the end result, which
should be monitored closely, but further analysis would be needed to determine
whether it is excessive.
Economy – Inflation Gone
■ China’s CPI
grew 1% YOY in January, a two and a half year low. PPI dropped 3.3% YOY in the
same month, representing its second consecutive decline.
Oil – Crude Runs Up in February
■ Twelve major
refineries, accounting for a third of China’s total refining capacity, plan to boost
runs 5% to 2.37 million bpd in February, according to a Reuters survey, after
cutting them to a nearly two and a half year low by the end of 2008.
Electricity – Installed Capacity Might Top
860 GW by Year-End
■ China’s total
installed capacity might increase to a record 860 GW by the end of 2009, up 9%
from the end of 2008, according to a forecast by the China Electricity Council.
Installed capacity gained 10.3% last year to 790 GW by the end of 2008 after
rising 14.6% in 2007.
Re-cap of Our Calls
■ Essentially, we
are making four calls in our China Commodities Weekly: economic trends in China,
our overall sector call, our individual commodity sector views, and our calls
for the contract negotiations for certain commodities. We re-cap our calls as
■ 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 China perspective,
should investors in the Western world be overweight, market weight, or underweight
in the global raw materials and energy sectors? To this question, our current answer
■ Individual Commodity Sectors: On individual commodity sectors, we are now positive on the copper,
steel, iron ore, uranium, urea, DAP, and hardwood pulp sectors. We are neutral on
aluminum, zinc, nickel, molybdenum, coking coal, thermal coal, potash, wheat,
corn, 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 China
■ Views on Annual Contract Negotiations: We now look for 30% drop in the 2009 annual iron ore contract. We expect
the coking coal 2009 contract price to drop to US$130/tonne. We expect the
potash 2009 China contract to increase by US$24/tonne to US$600/tonne.