China Commodities Weekly for
the Week of April 20 - April 24, 2009
Base Metals – Are These Imports Sustainable?
■ Last week, China released the detailed trade data
for March. The base metals imports data were extremely strong. In March, China imported
296,843 tonnes of refined copper, 85,965 tonnes of primary aluminum, 12,620 tonnes
of refined nickel, 25,370 tonnes of refined lead, 121,027 tonnes of refined
zinc, and 2,463 tonnes of refined tin, up 137.63%, 1,486.53%, 28.68%,
7,003.64%, 1,193.76%, and 106.55% year over year (YOY), respectively.
■ As we have repeatedly discussed in our recent China Commodities Weekly reports, there were three reasons that have driven
China’s buying spree for base metals: (1) strategic stockpiling by the
Strategic Reserve Bureau (SRB), (2) commercial restocking ahead of the seasonal
spring demand (and demand incurred by the stimulus package), and (3) domestic
production curb due to the shortage of scrap, the sharply lower by-product
revenue from sulphuric acid, and the lower treatment charges/refining charges
■ After months of strong imports, investors are
asking a very legitimate question: Given the global economic backdrop, are
these strong Chinese imports sustainable? To this question, if we take a deeper
look at the three reasons mentioned above, we would argue not.
■ First, the SRB is not buying at this level – its
job is to buy the dip, not chase the momentum. In fact, it is lending out the
materials it bought to traders (Minmetals) to calm down local markets now. We
notice that there has been much rumour surrounding the SRB selling in the past
two weeks. A lot of observers have dismissed the alleged selling as “smoke
without fire,” a view with which we would agree. In our opinion, the SRB may be
delaying the delivery of some booked tonnage and lending out some materials it
bought to traders to calm down the market. But its ultimate goal is to buy more
at cheaper prices.
■ Second, the bears could argue even commercial
restocking is about to come to an end: spring is already here and it is the
time for real demand to show up, proving restocking back in the winter months
■ And third, with pricing rallying, local production
is ramping up. Last week, we wrote that Chinese aluminum producers are
restarting at least 750,000 tonnes of annual capacity, and Chinese zinc output
was already up 8.2% YOY and 30.1% MOM in March.
■ That said, we still refrain from downgrading our
overweight call for the raw materials sectors, for three reasons. The first and
the more fundamental reason is China’s huge loan growth seen in the winter
months – eventually this should translate into economic activity and commodity
demand sometime in the coming months. Yes, restocking demand might be over, but
real demand will eventually pick up, in our opinion. The second reason is that
in the near term, China’s metal imports are likely to remain at fairly high
levels in both April and May, particularly for the flagship metal of copper,
simply because the Shanghai-LME price ratio remains supportive.
■ The last reason for our reluctance to downgrade is
based on an observation of recent history to answer the question: What would be
the most likely market reaction if China’s copper imports prove to have already
peaked? Exhibit 2 (sorry I cannot paste the chart from PDF) shows that in the
past two years in a row when China’s copper imports peaked in the spring,
copper prices stopped going higher, but did remain at a high level for a few
months before more serious pullbacks. If history repeats itself, China’s copper
imports are indeed highly likely to peak this spring, but even if this happens,
LME copper is likely to be stuck in a range of US$1.75-$2.25/lb for a couple of
months, allowing the copper-related equities to catch up, in our opinion. After
that, the direction of the global and Chinese economy will determine its fate.
Potash – Old Rumour, New Rumour, and New Forecast
US$200/tonne Indian Rumour Proven Accurate
■ Back on February 23, 2009, we quoted the potash
branch of China Inorganic Salts Industry Association (CISIA) as saying: “Recent
intelligence indicates that in the coming negotiation, India could bid
(counter-offer) for potash as low as US$200/tonne for the 2009 contract. This move
might become the catalyst for a pullback of the international potash price.”
■ After we published that rumour, we got much
pushback, some very furious. Last week, the CEO of Potash Corporation, Mr.
Doyle, in his earnings release conference call discussed the Indian offer at
length and this is part of what he said: “The Indians would like US$200 potash
to break the price in India from six and a quarter to $200 for the 2009
negotiations…. But if you have $200 potash, like the Indians say they would
like to have, and you stop all these potash expansions and you have a much
dearer shortage, much more severe shortage of potash in the next year or two,
you wouldn’t have $1,000 potash, you’d have $2,000 potash.”Well, here, Mr.
Doyle confirmed that our report more than two months ago was accurate.
■ We revisit the Indian rumour for two reasons:
first, we were questioned about our integrity two months ago – some investors
thought we just made up a rumour to gain undue attention. Now we are so happy
that we were proven not to have made up rumours, as we never do. Second, we
revisit the Indian rumour and investors’ response to it to show that, indeed, the potash sector is such a well-loved
sector. And this is one of the reasons that we do not advise investors to
underweight or short the sector – many investors are now willing to look
through the 2009 situation and focus on 2010 and beyond.
A New Rumour
Without Guarantee of Accuracy
■ With our last reported rumour turning out to be
accurate, we are now brave enough to report another rumour against the potash
sector. We heard that BPC met with Sinochem and Sino-Agri (or CNAMPGC) on April
17 to discuss contract pricing for 2009. After the meeting, a rumour was
circulated in the local Chinese market, indicating that Russian suppliers
offered Chinese buyers US$500/tonne (or a US$76/tonne discount to last year’s
contract price) for the 2009 Chinese contract, but this offer was rejected by Chinese
buyers. We stress that we are not making this rumour up (it is from an
important industry information source), but we could not verify its accuracy
and we do not know if it is real or not.
■ What we do know is that local sentiment in the
Chinese potash market remains low and spot prices have remained under pressure
in recent weeks. As we wrote a few weeks ago, demand for potash has come to a
near standstill with the main NPK production season now over. NPK production
represents 70% of China’s potash use.
■ On the pricing front, we wrote last week that after
a special meeting on April 15, China’s two potash importers, Sinochem and
Sino-Agri, had declared that their port quotation for Russian pink, Russian
white, and Canadian pink would be RMB3,700, RMB3,800, and RMB4,100/tonne,
respectively, for only one week. The importers urged end-users to place their
orders during the “promotion” week, as prices for all the grades would be hiked
by RMB200/tonne one week later. Last week, as promised, the port quotations by
the two importers were indeed hiked by RMB200/tonne.
■ However, our local contacts said the effort of “promotion”
failed miserably. Very few transactions were done in the promotion week, and
even after the port offer prices were hiked by RMB200/tonne last week after the
promotion, local spot prices continued to drop. In certain areas, imported MOP
was reportedly sold at port as low as RMB3,500/tonne. The local average retail
price dropped again last week to RMB3,875/tonne.
■ As we wrote last week, Chinese importers are stuck
with a loss from their import programs last year. For the time being, the
importers are trying to clear their inventory at ports, and should have no
incentive to book large volumes of potash in the near term if overseas suppliers
do not slash prices.
■ Further, we heard a rumour that at least one border
trade was recently concluded at US$480/tonne, although the volume was small.
And a US$475/tonne quotation is easy to obtain on a delivered at border (DAB)
basis. The prevailing border trade quotations imply US$520/tonne seaborne
■ Due to the weak local market environment, we are
now officially forecasting the China 2009 potash contract price to drop
US$51/tonne to US$525/tonne FOB from its 2008 level. We maintain our neutral
view on the potash sector from a China perspective.
Look for Potash
■ A Chinese delegation, led by China Supply &
Marketing Co-operatives (China Co-op), visited Laos in early April and signed a
“landmark” mine development contract with the Laos government to develop Laos’
huge potash reserve. The Prime Minister of Laos met with the delegation on
April 9, 2009 after the signing ceremony, and hailed the project as a milestone
of government-to-government co-operation between the two countries.
■ The project will have three phases. The first phase
is a 100,000 tonne pilot project to be finished by the end of 2009, the second
phase will increase the project capacity to 1 million tonnes by 2013, and the
third phase will further increase the project capacity to 3 million tonnes by
2017. This schedule sounds very similar to the three-phase Luobupo project that
we first reported to the Western investment community three years ago. The
Luobupo project was dismissed by many when we first reported it, but it turned
out to be the largest supply-side response during this potash supercycle, and
it will likely produce 800,000-1,100,000 tonnes of SOP for China this year.
■ We view the Laos move as an important development
for China to solve its long-term potash needs and a prelude for China’s more
active overseas acquisitions for undeveloped but proven potash assets.
■ In March, China imported only 147,484.81 tonnes of
MOP, down 61.7% MOM and 71.3% YOY. Among the 147,484.81 tonnes, 61,976.15
tonnes were from Germany, 42,984 tonnes from Jordan, and 36,736 tonnes from
■ In March, China’s DAP and urea exports slumped
70.7% MOM and 80.4% MOM to 99,862 tonnes and 74,779 tonnes, respectively, due
to the prohibitive 110% export tax.
Molybdenum – China Buying Europe Empty?
■ In this section, we review China’s molybdenum
market after our upgrade of the molybdenum sector on March 30. Helped by the
broader market rally and improved sentiment for the base metals sectors, the
molybdenum sector has performed well since our upgrade.
■ On the commodities side, however, shortly after our
upgrade, the spot price for molybdenum actually dropped slightly, and then
stabilized. The good news is that last week, the spot price for both
ferro-molybdenum and molybdenum oxide moved up quickly. One Chinese producer
was quoted as saying: “We are surprised about the price change in such a short
period of time. Prices are heard quoting within a wide range of US$8.15-US8.50/lb
(C&F for oxide) and there are no offers from overseas lower than US$8.15/lb
now.” Despite higher prices, the Chinese can’t find any sellers in Europe,
according to trading sources. Deals were done at higher prices closer to the
end of last week. “Some overseas traders and producers simply have no spot
material to sell… And we are waiting to buy,” said a trader. At the end of last
week, offers were already seen at US$9/lb.
■ Metal Bulletin reported the same scenario for
ferromolybdenum, which rose US$1 at the low end last Friday alone, due to
dwindling stock levels and a flurry of China-related activity last week.
Ferromolybdenum (basis 65%-70%) climbed to US$20.50-$22 per kg from US$19.50-$20.50
previously. Traders reported business late in the week at the high end of the
quote. “The speed at which it’s moving is frightening; you could buy at
US$19.50 a week ago,” said a trader. The reason for the move? Again, China, “China
is trying to buy Europe empty,” a trader told Metal Bulletin.
■ All this anecdotal evidence is supported by the
latest trade data. Official customs tally shows that China’s net imports of
molybdenum reached another record high, and is now close to 4,000 tonnes on a
metal content basis (see Exhibit 3).
■ On the negative side, major Chinese molybdenum
producers held a meeting and agreed last week to call on the Chinese government
to impose duties on imports and to launch an antidumping investigation on
imports. Further, Chinese producers also said that the government should remove
export duties, resume export tax rebates, reduce the mineral VAT to 13% from
17%, and lower or cancel the mining resource tax as a means to help molybdenum
mines. In addition, the producers plan to ask the SRB to stockpile molybdenum products.
In our opinion, the Chinese government would not listen to the producers, particularly the proposed import restrictions.
■ And last but not least, we observe that as another
negative for the molybdenum sector, like copper and other base metals, China is
still the only strong buyer for the metal. Traders still see no signs of
sustained life in Europe and the United States.
■ We maintain our positive view on the molybdenum
sector from a China perspective.
Uranium – China Looks at Australia for Projects
■ China National Nuclear Corp. (CNNC), the country’s
body governing all supply of nuclear fuel for power generation, has held
preliminary talks with Australian uranium miners, CNNC’s vice president said
■ “We have contacted counterparts in Australia, and
have held preliminary talks. But we need to verify the feasibility of certain
projects before making any more details public,” CNNC Vice President Jiangang
Qin told Dow Jones Newswires on the sidelines of the World Nuclear Fuel Cycle
2009 conference. “We want to focus on our own production but we’d also like to make investments similar to Japan,
to plug any shortage in Chinese uranium supply,” he said.
■ Talk of China seeking large-scale investment in
Australia’s uranium miners has intensified in recent weeks. One Sydney-based
investment banker said contact from Chinese companies had increased
exponentially over the past two months, with inquiries focusing on the coal and
■ As we wrote in our launching report for the uranium
sector, A Clear,
Long-term Bull Case, dated November 24, 2007, the market is clearly underestimating the
speed that China is adding nuclear capacity. In 2020, we estimate that China
will consume 15,700 tonnes of uranium a year. At this rate, China’s currently
known uranium resources can only last for five to 10 years. Clearly, in our
opinion, it is imperative for China to secure long-term supply through imports
■ After our launching report, China continued to add
new nuclear capacity to the list we published in the report. Just last week,
China started the construction of another major power plant. The Sanmen Nuclear
Power Plant, for which CNNC would be the plant operator, started its
first-phase construction on April 19 in eastern China’s Zhejiang Province. For
the first phase, the plant will install two third-generation nuclear reactors
that use Westinghouse Electric Corp.’s AP1000 nuclear technology. This would
make Sanmen the first nuclear facility in the world to use such technology, and
it is therefore hailed as “the biggest energy co-operation project between
China and the United States to-date” by Zhang Guobao, head of China’s National
Energy Agency, at the plant’s groundbreaking ceremony.
■ Investment on the first phase is worth RMB40
billion (US$5.86 billion). The first two generators are scheduled to start
operation in 2013 and 2014, respectively. The plant will ultimately run six
1.25 GW reactors when construction of the plant’s three phases is completed.
■ We now forecast that China will have total nuclear
capacity of 35 GW by 2015 and 75 GW by 2020, from the 9.068 GW operating today.
For the time being, China has over 20 nuclear reactors (mostly 1 GW each) under
construction; construction of half of these reactors has been started since
News in Brief
■ China produced 842,000 tonnes of methanol, up 39%
MOM but still down 8.4% YOY. In the first three months, China’s total methanol
output was 2.079 million tonnes, down 21.7% YOY.
■ In March, China imported 653,000 tonnes of
methanol, up 10.45% MOM, with an average import price of US$186.61/tonne. In
the same month, China exported only 300 tonnes of methanol. These data pushed China’s methanol net imports to
another record high.
■ China’s large- and medium-sized steelmakers had a
combined loss of RMB1.9 billion in March, according to China Iron and Steel
Association. Nearly half of the steel majors were mired in red ink last month.
■ “Starting in April, no steelmakers in China are
making a profit,” said Ansteel’s President last week.
■ Separately, the Xinhua News Agency quoted an
official from the Ministry of Industry and Information Technology as saying: “China
may have oversupply of more than 100 million tonnes of crude steel in 2009.”
■ Power output declined 3.9% YOY at mid-April,
compared with a 3.5% drop in early April, according to the State Electricity
Regulatory Commission. China’s power output is now widely followed as an
important concurrent indicator for the country’s industrial activities.
■ China made it public last week that the National
Grain Reserve would continue buying domestic soybeans for stockpiling, until
June 30. The reason for the purchases was explicitly to buoy local prices, as
well as to protect “planting interest” by local Chinese farmers.
■ The head of China’s State Administration of Foreign
Exchange disclosed last week that China has increased its gold reserve from 600
tonnes in 2003 to 1,054 tonnes currently. This makes China one of the six
countries holding over 1,000 tonnes of gold. Gold now makes up 1.6% of China’s
FX reserve – this level is actually lower than the 2% back in 2003 (because of
the sharp increase in overall reserves in recent years). The increase in gold
reserve was achieved by buying in the domestic market and from domestic
■ China was the world’s largest gold producer last
year and does not permit exports of gold ingots. China produced 282 tonnes of
gold last year.
■ On the central bank’s balance sheet, for the time
being, it still shows 600 tonnes of gold, but this will be adjusted to 1,054
tonnes very soon.
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 in the global raw materials and
energy sectors as a whole? To this question, our current answer is overweight.