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Msg  59869 of 65647  at  4/14/2009 11:27:01 AM  by


China Update

China Commodities Weekly for the Week of April 6-10, 2009

Preliminary Trade Data Review

Last week, we identified three reasons for China’s huge commodities imports over the winter months. To repeat, the first reason is strategic stockpiling; the second reason is due to the fact that sharply lower commodity prices have rendered high-cost Chinese production unprofitable, making low-cost imported materials more competitive in the Chinese market; and the third reason is commercial restocking ahead of anticipated demand in the spring.

Using this three-reason framework, we can easily understand why China’s copper and iron ore imports reached new record highs in March again. In fact, China’s imports for a range of commodities reached record or very close-to-record high levels last month.

Copper – Where Have All the Imports Gone?

As we wrote last week, if all three reasons work for one commodity, the case for China’s imports becomes very strong, and the most visible example is copper.

The March data proved that. China’s imports of unwrought and semifinished copper hit a fresh record in March, up 14% month over month (MOM) to 374,957 tonnes. On refined basis, March imports are likely to top 300,000 tonnes for the first time ever.

As to the first reason, we estimate that at least 75,000 tonnes of March imports will go to the warehouses of the Strategic Reserve Bureau (SRB).

Regarding the second reason, China is losing its cheap supply of scrap, increasing China’s refining and fabrication costs. China imported 5.6 million tonnes of copper scrap in both 2007 and 2008. Assuming 30% metal content, this translates into some 1.7 million tonnes of copper content supply (and this is only based on official customs data; smugglers also moved a lot of scrap into China in the past). In other words, in 2007 and 2008, every month China received on average 464,000 physical tonnes or 139,000 metal tonnes of copper. In the first three months of 2009, however, on average China imported only 244,000 physical tonnes or 73,000 metal tonnes of copper scrap a month. Also taking into consideration lower domestic output of scrap and declined smuggling, we estimate that on average every month China is losing some 80,000 tonnes of copper metal content due to the shortage of scrap, which is now being replaced by imported refined copper. As a trader in China said last week: “Our clients, who used to buy brass for production, are now buying refined copper… Such additional demand is huge, given demand for copper scrap has been much underestimated for years.”

Many clients have asked us recently “Where has all the copper gone?”, as China’s imports surged but domestic visible inventory such as SHFE inventory remained low. The explanation of the paradox becomes simple if clients buy into our views on the SRB and scrap situation in China as discussed above. Indeed, if the SRB accounts for 75,000 tonnes of refined imports and scrap shortage accounts for another 80,000 tonnes in March, this leaves a balance of some 145,000 tonnes of refined imports to be accounted for by normal fundamental demand. This is a balance that can barely meet the commercial restocking demands and gradually increasing physical copper consumption, as the spring revival is already underway for copper. Our local contacts told us that electricity wire and cable producers are running close to full capacity now to cover the demands from the massive grid expansion under the RMB4 trillion stimulus package.

Iron Ore – A Record Unlikely to Be Repeated in April

If copper claims all three reasons for the increase in imports, iron ore only claims two, as there is no strategic stockpiling for iron ore. However, commercial restocking and reduced local high-cost output still pushed China’s iron ore imports to a fresh record of 52.1 million tonnes in March, up a massive 46% year over year (YOY).

Some observers said last week that 70% of China’s iron ore mining capacity is now out of operation due to negative margins. We disagree with the 70% figure, but we do see the same issue. To our understanding, large iron ore mines, particularly those owned by major steel mills, are still running at full capacity. But numerous private, small iron ore mines are now shut down. Estimating the scale of the shutdown is difficult, as many of those were not in official statistics – one can argue that some of them are effectively illegal mines. (If only looking at official data, one will actually find China’s iron ore output was up 6.9% YOY to 105.43 million tonnes in the first two months of 2009.) Our best “guesstimate” is that some 20% of China’s mining capacity that operated in the first half of last year is now closed. This equals an output loss of some 140 million physical tonnes annualized, although on a metal content basis the loss is not as nearly as large, as the Fe content for these capacities is very low.

The lost domestic output explains why we are still looking for a 35% price cut for the 2009 annual contract, in contrast to the 40% cut requested by the Chinese negotiators, which is also the market consensus.

On the commercial restocking side, China has done a good job after two months of record imports. Iron ore stocks at China’s major ports rose last week to 68.57 million tonnes, the highest since November 2008. Therefore, we do not expect April imports to reach another record. The recent freight rate decline for dry bulk cargoes indicates China’s iron ore imports are already moderating.

Imports for Other Key Commodities Also Very Strong

In March, China brought in 16.34 million tonnes of crude oil, or 3.86 million barrels per day, up 26% MOM to the highest level in a year and just 5.5% short of the all-time record set in March 2008.

For coal, China’s imports hit a record 5.72 million tonnes in March, up 37.4% YOY, as China’s big power firms use coal imports as an alternative and as a playing card against coal miners, who have been pushing for a higher annual contract price. Coal exports in March grew 58% MOM to 2.27 million tonnes.

Regarding steel, China imported 1.27 million tonnes of finished steel products and 0.46 million tonnes of steel semis in March, and in the same month China exported 1.67 million tonnes of finished steel products and exported no steel semis. As a result, China became a net importer of steel in March for the first time since November 2005. Even for aluminum, China’s imports were up 91.6% YOY to 147,181 tonnes in March.

Macro – More Positive Data

Huge Loan Growth Confirmed

Actual loan additions in March beat every previously rumoured number. Loan additions rose to a record RMB1.89 trillion (US$277 billion) last month, bringing the total to RMB4.58 trillion in Q1/09. This compares with total loan additions of RMB3.63 trillion in 2007 and RMB4.9 trillion in 2008. The People’s Bank of China (PBOC) also announced last week that M2, the broadest measure of money supply, grew 25.5% YOY year-to-March, the most on record. Again, we note the money supply is hugely expansionary, as it massively exceeds the expectation of real GDP growth (say, 8%) plus inflation (CPI is negative for now).

As a result of these stellar numbers, there were growing concerns in China that the central bank might soon have to restrain credit by re-introducing the loan quota system. However, in a statement posted on the central bank’s website last weekend, the PBOC seemed to want to dampen this speculation. The Chinese central bank said that it would “continue to implement moderately loose monetary policy and maintain the continuity and stability of policy.” It pledged “ample liquidity” to “ensure money supply and loan growth meet economic development needs.”

The statement indicates that reviving growth remains China’s policy priority, even amid concern that the credit boom will lead to bad debts and asset bubbles. In its statement, the central bank only pledged to prevent loans from going to high energy-consuming or polluting enterprises or to industries where there is overcapacity. But it also reiterated support for loans to the agricultural sector, as well as to small and medium-sized companies.

Wen’s Assessment and 8.3% IP Growth

Separately, a key macroeconomic datapoint, industrial production (IP), was leaked to be 8.3% YOY in March, compared with 3.8% in the first two months. As this figure was mentioned by Premier Wen Jiabao, it should be taken by the market without any doubt.

“China’s industrial production climbed 8.3% YOY in March and consumer demand grew relatively rapidly in the first quarter, adding to signs that the government’s stimulus package is taking effect,” Wen was cited as saying. Wen also cited a MOM rebound in trade, the rebound of PMI, and gains in stocks and property transactions as evidence that the stimulus is working. Signs of recovery also include a 26.5% jump in urban fixed asset investment in the first two months.

Vigilance is still needed, however, as the global financial crisis has not seen its bottom yet and is continuing to deepen and spread, Wen said. We note this assessment by Wen is very important in order to interpret the near-term direction of China’s macroeconomic policy. The PBOC’s statement mentioned above, which is designed to dampen the speculation of credit curbs, is likely to be based on this assessment.

Furthermore, the China Securities Journal reported over the weekend that China is planning a new economic stimulus package targeted at boosting consumption.

Strong March Property Sales

March sales statistics confirmed our view that home sales in major Chinese cities are exploding. In the month, sales in Shenzhen, Guangzhou, Hangzhou, Shanghai, Beijing, Tianjin, Chongqing, and Chengdu were up 149%, 208%, 28%, 217%, 149%, 132%, 155%, and 59% YOY, respectively. For some of these cities, the March sales numbers are actually setting new records.

For the country’s urban area as a whole, official data shows that “total floor space sold” was up 8.2% YOY in Q1/09. Based on this figure, we calculate that sales were up 16.3% YOY in March alone.

The key issue for the Chinese property market right now is whether the sudden explosion of sales is merely a sudden and temporary burst of pent-up demand accumulated during the market’s 15 months of downturn, or a new trend driven by improved market expectations and easy credit accessibility. At this stage, our bet is the former, but we will closely watch for sales data in the next three months. If the recent level of strong sales is maintained, inventory in major coastal cities will be reduced to close to six months of sales in three to four months; and when inventory levels reach six months of sales, we expect developers to finish their de-stocking process and begin to buy new land and develop new projects.

In fact, investment in China’s overall real estate sector has already improved slightly. The National Bureau of Statistics said today that China’s real estate investment grew 4.1% in Q1/09. As property investment grew only 1% in the first two months, this means that growth in March alone would have been much stronger to bring the full quarter figure to 4.1%.

Auto Sales Hit Record High in March…

China’s auto sales in March rose 5.01% YOY to a monthly high of 1.11 million units, data from the China Association of Automobile Manufacturers showed last Thursday, exceeding the previous record high of 1.06 million vehicles set in March 2008. Passenger vehicle sales this March also rose 10.26% YOY to 772,400 units.

We note the strong sales were driven mainly by low-end cars and from inner provinces. As part of its stimulus for the auto industry, China is encouraging rural residents to trade in their polluting three-wheelers for mini-trucks by providing subsidies of up to RMB5,000 for each vehicle. Other measures the government has introduced this year include reducing some road taxes and halving the purchase tax to 5% on cars with engines that are 1.6 litres or smaller.

To show the contrast between the auto markets in China versus the Western world, GM said last week that its sales in the United States fell 45% in March but rose 24.6% YOY in China.

…But Electricity Output Moderated in the Second Half of March

China’s electricity output in March fell by 0.71% YOY to 286.73 million megawatt hours (MWh), state media reported last week. State Power Dispatching Center statistics show that domestic electricity output grew by 1% YOY during the first 10 days of the month. However, output fell by 2.08% YOY during the last 10 days of the month, which led to the overall drop for the month.

We note that power output in early March might have been helped by an increase in heating demand during several cold spells, but going into late March, there was no apparent improvement in demand from downstream sectors, including steel and non-ferrous metals. As we discussed in the first section, domestic metal output has been hurt by negative margins due to low commodity prices.

On the positive side, the 0.71% decline in electricity in March moderated from the heavier loss in the first two months of 2009. China produced 488.3 million MWh of electricity over the first two months of this year, down 3.7% YOY.

Overall Observations

With record loan additions, record money supply, record auto sales, record imports of copper, iron ore, and coal, strong rebound of IP, and strong rebound of property sales in March, we have no alternative but to maintain our overweight call for the global raw materials and energy sectors from a China perspective, even though we believe these sectors are technically over-bought. Indeed, what has been shown in March’s macro and trade data is exactly what we have been calling for in recent months – a “spring revival.”

News in Brief

Steel – Daily Output Fell in March

China’s daily crude steel output in March fell more than 4% MOM, as Chinese steel mills cut production due to declining exports and lower prices. China produced about 42.9 million tonnes of crude steel in March for a daily output rate of 1.384 million tonnes, according to figures from the China Iron and Steel Association.

The daily rate fell from February’s 1.447 million tonnes, as mills again scaled back production after a short-lived recovery in domestic prices had spurred an output increase early in the year.

DAP – Sales to India under Discussion

Chinese suppliers YTH and Wengfu and Indian importers IPL and IFFCO are negotiating a large supply deal totalling 400,000-600,000 tonnes of DAP for shipment starting in June, when the Chinese export tax reverts to 10% from the current 110%. Prices have been rumored at US$370-US$375/tonne CFR, according to CRU’s Fertilizer Week.

Economy – Exports Dropped Again, But Trade Surplus Rebounded

In March, China’s exports dropped 17.1% YOY while imports declined 25.1% YOY, resulting in a trade surplus of US$18.56 billion. This surplus is much higher than either economists’ consensus of US$12.1 billion or February’s actual surplus of US$4.84 billion.

Recap 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 recap our calls as follows:

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 the global raw materials and energy sectors? To this question, our current answer is overweight.

Individual commodity sectors: On individual commodity sectors, we are now positive on copper, steel, iron ore, uranium, molybdenum, urea, DAP, methanol, and hardwood pulp. We are neutral on aluminum, zinc, nickel, coking coal, thermal coal, potash, wheat, corn, soybeans, 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 perspective.

Views on annual contract negotiations: We now look for a 35% drop in the 2009 annual iron ore contract. We expect the 2009 China contract potash price to be close to the 2008 contract price of US$576/tonne.


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Msg # Subject Author Recs Date Posted
59873 Re: China Update drtkw 0 4/14/2009 10:44:46 PM
59875 Re: China Update drtkw 0 4/15/2009 1:03:06 AM

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