Commodities Weekly for the Week of November 9-13, 2009
Macro – De-stocking in a Strong Environment
■ Overnight, China released its October
macroeconomic data and its output and preliminary trade data for key
commodities. The data are fully in line with our macro themes since late
summer: on the macro side, the economic recovery in China is still on the right
track, led by the still-strong infrastructure investment, the ongoing
construction boom in the housing sector, and a recent recovery of external
demand for Chinese goods. On the commodity side, however, major commodities
markets like steel, base metals, and chemicals are undergoing a “mini
de-stocking” cycle, as China had over-imported in the
first half of this year and Chinese domestic output has ramped up very strongly
since summer. In short, the overall picture in China is that demand for
commodities is robust, but at the same time supplies are ample – it is a
de-stocking in a strong environment.
Strong Macroeconomic Readings
■ Last week, when reviewing
the October PMI, we wrote: “With this level of manufacturing activities (PMI
55.2), China’s industrial production
might well grow at over 15% YOY in October.” This prediction proved correct.
Official data showed that all growth data are in line with or exceeding
economists’ consensus. Industrial production climbed 16.1% YOY last month
(consensus 15.5%), a 19-month high; fixed asset investment rose 33.1% YOY in
the first 10 months of 2009 (consensus 33.5%); and retail sales jumped 16.2% in
October (consensus 15.7%). We note that all these strong YOY growth data were
partially helped by the low statistical base effects.
■ The monetary data are
mixed. M2 money supply grew 29.4% YOY year-to-October, up from 29.3% YOY
year-to-September. What disappointed the market is that in October, Chinese
banks extended “only” RMB253 billion worth of loans, lower than the market
consensus estimate of RMB370 billion. We note that although the total new yuan
loan level is lower than expected, it is mainly due to a drop of bill financing
and short-term loans; long-term loans actually increased a relatively healthy
RMB411.4 billion (residential and commercial). In the first 10 months of 2009,
total new yuan loans reached RMB8.92 trillion, far exceeding the RMB4.91
trillion total loan additions in all of 2008 and RMB3.63 trillion loan
additions in 2007.
■ On the trade side, Chinese
exports still dropped 13.8% YOY last month while imports declined 6.4% YOY,
resulting in a higher-than-expected trade surplus of US$24 billion.
■ Inflation is still not a
near-term concern. Both CPI and PPI remained in negative territory in October,
down 0.5% YOY and 5.8% YOY, respectively.
■ We observe that this set of
macroeconomic data is supportive for the global raw materials sectors, as it
indicates the economic recovery in China is still in good shape,
and near-term policy risk is not high due to still-mild inflation pressure.
Supply-Side Response for Key Commodities
■ As for major commodities
output data, our concerns about supply-side response have once again been
confirmed. In October, China’s refined copper output grew 28.4% YOY and 1.1%
MOM to a new record of 399,300 tonnes; aluminum output increased 17.1% YOY and 4.4%
MOM to 1.26 million tonnes; refined nickel output increased 40.7% YOY but was down
6.6% MOM to 19,062 tonnes; and refined zinc output grew 9.8% YOY but dropped 1.2%
MOM to 405,200 tonnes. We note that both refined copper output and primary aluminum
output hit a record high for the second straight month.
■ On the bulk side, in
October Chinese raw coal output grew 21.1% YOY and 3.8% MOM to 273.068 million
tonnes; iron ore output jumped 18.4% YOY but dropped 1.4% MOM to 83.876 million
tonnes; and crude steel output grew a massive 42.4% YOY and 2% MOM to 51.747
million tonnes. We note that raw coal, iron ore, and crude steel output in
October represents the second-highest output levels for all three commodities.
In addition, finished steel products output reached a fresh record of 62.449
million tonnes last month, up 41.6% YOY and 2.1% MOM. The massive output growth
for steel products was led by rebar – its output grew 53.1% YOY and 7.1% MOM to
11.585 million tonnes.
■ On the oil side, October
crude run increased 10.4% YOY and 1.4% MOM to a new record of 33.286 million
for Everything, Except for Crude
■ With the massive imports
since the beginning of the year and surging local production since the summer,
supply in the local market is ample for most commodities, particularly base metals.
As a result, Chinese imports for key commodities dropped sharply in October on
a sequential basis. This is what we have called a “mini de-stocking” cycle. The
good news is that this de-stocking cycle is happening in a strong macroeconomic
environment, which supports underlying consumption.
■ Overnight customs data show
that in October, China’s total copper imports (including semis)slumped to
263,109 tonnes from 399,052 tonnes in September; copper scrap imports declined
to 260,000 tonnes from 406,477 tonnes; unwrought aluminum imports dropped to 86,611
tonnes from 195,877 tonnes; iron ore imports declined to 45.47 million tonnes
from 64.55 million tonnes; and soybean imports moderated to a one-year low of
2.52 million tonnes from 2.75 million tonnes.
■ The only bright spot on the
import side is crude oil. In October, China imported 19.34 million tonnes
of crude compared with 17.2 million tonnes in September, and up 19.7% YOY.
Strong crude oil imports, together with the record crude run as discussed in
the output section, paint a picture of firmer local demand. Earlier this week,
the President of Sinopec, Asia’s largest refiner, said he is “very confident”
that China’s appetite for oil will accelerate in 2010, with demand growth for
refined fuel expected to hit 8%, up from an estimated 3% in 2009.
Copper vs. Iron Ore
■ We note that although
copper and iron ore imports were both down about 30% MOM in October, the
effects on the market are different. For copper, overall inventory remained
high and de-stocking will likely continue in the next few months. We note that
in the past two months, the bonded warehouses in Shanghai are “getting full”. Local
market participants estimate that some 300,000 tonnes of copper are stored in
bonded warehouses now. In past years, the normal level for bonded materials was
in the range of 30,000 tonnes to 70,000 tonnes.
■ For iron ore, however,
local inventory has already been drawn down due to lower imports in October
and, more importantly, the still-strong steel output rate. In fact, since early
September, iron ore inventory at main Chinese ports has declined about 9 million
tonnes or 11.6%. As we write in the output section, Chinese crude steel
output grew a massive 42.4% YOY and 2% MOM in October to 51.747 million tonnes.
The strong steel output has put pressure on ore supply. In the spot market,
Indian ore of 63%/63.5% iron content has firmly topped US$100/tonne this week,
with some miners asking over US$105/tonne. In addition to high steel
production, worries about supplies from India and lack of spare capacity
in Western Australia also support spot iron ore
pricing. An Indian official said the government of the eastern Indian state of
Orissa would inspect several iron ore mines in a crackdown on firms infringing
mining or environmental rules.
■ The only concern for the
iron ore market now is the lagging steel pricing. Although the sharply higher
iron ore prices, together with the strong demand from the property sector, have
gradually pushed steel prices higher in China since early October, the
record high steel production in recent months is preventing the market from seeing
any price spikes. Unlike iron ore, the current inventory for steel products
remained on the high side, indicating local supply is readily available.
Compared to iron ore, the recent rally of steel prices in China is much more modest. Since
the recent lows, the iron ore price has rallied at least 30% and steel prices
have only gone up about 7% (rebar) to 10% (HRC). The lagging steel price has
put pressure on the steel mills’ margins and may eventually hurt their
incentive to maintain high output rates and, in turn, high ore purchases.
Strong Home Sales and Home Construction
■ Property sales remained
strong in China in October. Total area
sold rose 81.8% YOY to 79.98 million m2. New area under construction remained
strong in the same month at 108 million m2, up 48.8% YOY.
■ As for leading indicators,
land acquisition amounted to 26.2 million m2 in October, up 27% YOY and land
development area rose 19.9% YOY to 17.39 million m2, while new start-ups grew
54.6% YOY to 82 million m2.
■ We view the October data
from the property sector as supportive of our view that a construction boom in
the Chinese property market is ongoing. This construction boom should
eventually trigger a second leg for Chinese raw materials demand next spring
when the ongoing mini de-stocking cycle finishes.
Auto – Sales
Still Strong in October
■ China’s passenger cars sales
surged 75.8% YOY but declined 6.8% MOM to 946,400 units in October. Overall
vehicle sales, from trucks to buses, jumped 72.5% YOY but dropped 7.5% MOM to
1.23 million units in October.
■ In the first 10 months of
2009, a total of 8.19 million passenger cars were sold in the country, up
45.18% YOY, exceeding a total of 6.76 million units sold in the whole of 2008.
Overall vehicle sales rose 37.71% YOY to 10.89 million units from January to
October this year, compared with last year’s total of 9.38 million units.
■ Industry observers had
expected the market to slow next year if the government opts not to renew the
policy incentives, which will expire by the end of this year. The good news is
that a report by China’s Ministry of Industry and
Information Technology indicated last week that the government might extend
some of the existing incentives, including cuts in sales tax for small cars, as
well as introduce other steps.
■ So far this year, China’s macroeconomic data and
commodities import flow have largely been disconnected. In early 2009, official
economic data was weak, but China became dominant importers
for almost all major commodities. The imports in early 2009 were driven by the stimulus
package, re-stocking demands, and lower domestic output due to low commodity prices.
But recently, in contrast, China’s macroeconomic data has
picked up strongly, but imports have lagged, as China over-imported in the early
part of 2009 and local commodity output has surged to record highs after the
summer due to stronger commodity prices.
■ We expect the ongoing mini
de-stocking cycle to last into February 2010, as very soon China will enter the harsh
winter season in the North and the Spring Festival season in early 2010, neither
of which will be good for construction activities. We expect China’s commodity imports to
come back strongly in the spring of 2010, when de-stocking comes to an end and normal
construction season begins.
News in Brief
Oil – The Pricing Mechanism
■ On Monday, China raised retail gasoline and
diesel prices by RMB480 (US$70.32) per tonne. Although the hike was widely
expected, its magnitude is higher than the market expectation of RMB350/tonne.
This move has pushed diesel and gasoline prices to record levels in China.
■ It is unclear what the
government will do if the crude oil price rallies over US$80/barrel for a sustainable
period. Under the year-old pricing mechanism, Beijing may change fuel prices when
a 22-day moving average crude price moves more than 4%, as long as the international
crude oil price is below US$80/barrel. When changing prices, the government
will ensure a “normal refining margin” and align domestic fuel prices with
international crude oil costs.
■ Industry observers have
been speculating in the past year on what will happen if the crude cost is over
US$80/barrel. A recent Reuters report might shed some light on this. The report
quoted “a senior industry analyst with knowledge of the pricing regime” as
saying that if crude oil is below US$80/barrel, the normal refining margin is
set at 5% of the corresponding crude cost. As crude moves from US$80/barrel to
US$105/barrel, the margin will be lowered proportionately to 0% from 5%. When
crude is between US$105/barrel and US$130/barrel, refining margins will remain
at zero, but retail fuel prices should still reflect crude costs, said the
analyst, who declined to be named due to the sensitivity of the issue. When
crude rises above US$130/barrel, fuel prices will be decoupled from global
crude costs and the government will use tax incentives or subsidies to
encourage oil firms to keep producing fuel, he added.
Coal – Heavy Snow Hit Shanxi Province
■ Thousands of vehicles have
been trapped on roads after two days of snow in China’s biggest coal-mining
province, disrupting the movement of people and coal, state media reported on Wednesday.
Some 10,000 vehicles and 30,000 people were stranded in the northern province of Shanxi by the snow, which began
on Monday. Places across the province hit by the jams include Datong, Changzhi, and other big
coal-mining centres. But there were no signs yet that the supply disruptions
have seriously hurt power or industrial production.
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
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.
commodity sectors: On individual commodity sectors, we are now positive on the
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, soybeans, 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 perspective.
■ Views on annual
contract negotiations: We are looking for a 12.5% increase 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 China potash contract price to drop
US$181/tonne from its 2008 level to US$395/tonne FOB.