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
■ 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
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
■ 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
■ 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
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.
■ 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
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.
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.
■ 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
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.
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
■ 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.