China Commodities Weekly
for the Week of November 30 – December
Fertilizers and Chemicals – Market Firmer
■ Two of our November reports
focused on chemicals and fertilizers. Our report on November 5,
2009 covered DAP
and potash, and our report on November 24, 2009 discussed urea and
methanol. In today’s report, we are not going to revisit our investment themes –
we just would like to offer a quick update on the market developments after
■ Following our note on
November 5, in which we wrote that “China might become a net
importer of DAP” (section “DAP – Two-way Trade”), we now understand that China might have booked 600,000
tonnes of DAP for delivery in December-January. With this booking, China would surely become a net
importer of DAP in the foreseeable future. We note the local market remained
tight and the price is still on the rise (see Exhibit 1). Chinese imports have
obviously tightened up the international market. Yesterday, Mosaic said that “we
are seeing early signs of a recovery… This is especially true in the phosphate
market right now, but there is also activity in the potash market.”
■ As to potash, we understand
that a delegation from BPC is in China now holding talks with Sinofert,
Sinochem, and Sinoagri. As we wrote on November 5, “from a trading perspective,
we also agree that a China settlement, at whatever level, is likely to trigger some
buying interest in the potash sector, as investors will see the China settlement
as the bottom, which should remove price uncertainty in the near term.”
■ We also note that NPK
producers in China have been more active in purchasing
potash recently. This is hardly surprising, though, as NPK producers tend to
buy potash in November-January for production in late winter and distribution
in early spring to meet the demands of the spring planting season. As a result,
we note that although producer inventory remained very high in China, well in excess of 2
million tonnes, port inventory has fallen rapidly in recent weeks (see Exhibit
2). The local wholesale price has recovered by about RMB200/tonne in the past
two weeks. The port wholesale price has firmed to RMB2,700-2,800/mt
ex-warehouse. MOP from Qinghai Salt Lake, with 60% K2O, is still
quoted at RMB2,400/mt on a C&F basis.
■ Urea and methanol markets
are also on the rise in China, supporting our “tradable
rally” call dated November 24, 2009. We understand that
Chinese urea export quotation is over US$290/tonne now, up another US$15 in the
past two weeks, driven by higher coal and natural gas costs. Local wholesale and
retail prices are also in an uptrend (see Exhibit 3).
■ For methanol, C&F China
price is now quoted at US$283/tonne overnight, up from US$250/tonne in the
middle of November (see Exhibit 4). Methanex’s Asian Pacific price is now
listed at US$330/tonne for December, up 10% MOM.
■ Purely from a China perspective, DAP is
our preferred play, followed by methanol and urea, and then followed by potash. From a global perspective,
our Fertilizers, Biofuels & Chemicals analyst, Sam Kanes, is more positive
Gold – Will China
■ Every once and a while, the
gold bulls become excited about the potential of China’s diversification of its
foreign exchange reserve into gold. Back in November 2008, the talk was that China had “announced” that it
diversify its foreign exchange (FX) reserve into gold by buying 4,000
gold. That was proven to be fake news, though it did move the
for a few sessions.
■ One year later, gold bulls
are finding more excitement. A few days ago, China Youth Daily quoted Ji
Xiaonan, who chairs the supervisory board for big state-owned companies under
the State Council’s state assets commission, as saying that a team of experts
from Beijing and Shanghai had set up a task force
last year to look at the issue of gold reserves. “We suggested that China’s
gold reserves should reach 6,000 tonnes in the next three to five years and
perhaps 10,000 tonnes in eight to ten years,” the paper quoted him as saying.
■ Although we do acknowledge
that Ji Xiaonan is a high-ranking official in China, and therefore his words
have more credibility than the rumours of one year ago, we would still observe
that it is the central bank, not the State Assets Commission, that determines
China’s gold holdings in its foreign exchange reserve. And the central bank
officials do not seem to be impressed by gold. The recent sales from the IMF to
the Indian central bank were a good example: the People’s Bank of China (PBOC)
did not compete with India to buy gold, although PBOC
was tipped to be the top candidate on the purchasers’ list for the 400 tonnes of
gold offered by the IMF.
■ Yesterday, Hu Xiaolian, a
vice-governor of PBOC, weighed in by calling the current gold price a “bubble.”
“We must keep in mind the long-term effects when considering what to use as our
reserves,” Hu told reporters in Taipei, when asked if China had plans to increase its
holdings in its foreign exchange reserves. “We must watch out for bubbles
forming on certain assets, and be careful in those areas.”
■ In our opinion, the
comments from Hu are a lot more credible than those from Ji, as PBOC has the authority
to determine China’s gold holdings. And as we
have long argued, the judgment of PBOC is reasonable. To us, although China does need to diversify its
FX reserve, a purchase of 4,000 or 5,000 tonnes of gold is too big to
implement, but too small for China to diversify.
Too Big to
■ It is almost impossible to
buy a few thousand tonnes of gold in the spot market. Just to draw a
comparison, the global annual gold demand is about 4,000 tonnes and the gold
annual mine output is about 2,500 tonnes.
■ Some may argue that China can buy the gold through
inter-central bank swaps. However, even for this channel, 4,000 tonnes is still
too large an amount. For the time being, the United States holds the largest amount
of gold in reserve, at 8,134 tonnes, followed by the German central bank, which
holds 3,408 tonnes. Therefore, among the world’s central banks, only the U.S.
Fed could do a 4,000-tonne swap in one deal with China, but this is highly unlikely,
unless the Fed needs money in a desperate way (and if the Fed is indeed
desperate, it can always print money).
Too Small for
■ We calculate that 6,000
tonnes of gold is about 192.9 million ounces; at a gold price of US$1,200/ounce,
it is worth some US$231 billion. Given the size of China’s FX reserve, which is now
over US$2.27 trillion, the proposed diversification is only slightly over 10%. In
other words, even if China buys 5,000 tonnes of gold
to top up its existing reserve holding of 1,054 tonnes to just over 6,000
tonnes, it would not serve the purpose of diversification very well.
News in Brief
■ China may impose a tax on
aluminum after imports surged and pressured domestic producers. The rising
imports led to lots of pressure on the domestic market, said Yu Dongming, a
director at the industry coordination department of NDRC, the country’s top planning
commission. The nation doesn’t have an import tax on the metal currently. “We haven’t
made a decision but we’re closely watching it...This has aroused attention from
the cabinet,” Yu said. Chinese imports of aluminum jumped to 1.4 million metric
tons in the first ten months of 2009.
Grain – GMO on the Go?
■ China has approved its first
strain of genetically modified rice for commercial production, two scientists
involved in the approval process told Reuters last Friday, potentially easing
the way for other major producers to adopt the controversial technology. The
Chinese Ministry of Agriculture’s Biosafety Committee issued biosafety
certificates to pest-resistant Bt rice, with large-scale production to start in
two to three years. Bt rice would help reduce the use of pesticide by 80%,
while raising yields by as much as 8%.
■ China’s Academy of Agricultural Science also developed phytase
corn, which will help pigs digest more phosphorus, enhancing growth and
reducing pollution from animal waste and fertilizer runoff.
■ China, which wants to raise
grain production 8% to 540 million tonnes a year by 2020, has splashed out on
GMO research, with US$3.5 billion being spent on rice, corn, and wheat.
■ The rice and corn strains
are China’s first GMO grains
approved for commercial production, although it already permits GMO papaya, cotton,
and tomatoes. The strains still need to undergo registration and production
trials before commercial production can begin in restricted areas, which may
take two to three years, the scientists said.
Oil – Imports to Remain High
■ China’s crude oil imports are
expected to stay at a high rate of around 18 million tonnes per month, or
around 4.3 million barrels per day, in the coming two to three months, the
official Xinhua news agency reported in a newsletter on Tuesday. With new oil
tanks, pipelines, and refining projects set to commence operation in coming
months, crude throughput would likely hover around 33 million tonnes per month,
or about 8 million bpd, the report said.
■ Domestic oil processing hit
a high of 33.29 million tonnes in October, while crude imports, at more than 19
million tonnes in October, were the second highest in history.
■ “The petroleum and chemical
industry may enter an expansionary period before the end of the year,” the
report said, citing the China Petroleum and Chemical Industry Association.
■ Crude oil inventories were
estimated to have risen 800,000 tonnes in October, the China Oil, Petrochemical,
and Gas newsletter added.
Coal – Shanxi’s
■ Shanxi Province plans to limit its coal
output to between 670 million tons and 700 million tons in 2010, state media
reported on November 30.
■ The Shanxi Coal Industry
Bureau (SCIB) estimated that coal supply and demand will rise steadily with the
recovering economy, prompting an 8% YOY increase in coal output next year,
Xinhua news agency reported.
■ SCIB estimated that the
province’s coal output will fall to about 620 million tons in 2009, from about
656 million tons in 2008, due to the bureau’s efforts to consolidate the coal mining
industry this year. So far, the number of coal mines in the province has
dropped to 1,053 from 2,598, as coal mines with an annual output below 300,000
tons have been eliminated.
■ The province also plans to
expand its railway transportation capacity by 50 million tons to 400 million
tons a year.
Macro – November PMI
■ The headline Chinese PMI
for November was flat MOM at 55.2. Although the headline number is still very
strong, there is a little weakness underneath. This is because the forward looking
sub-indices, like new orders, were slightly weaker, while inventory sub-indices
were visibly higher.
■ The New Orders Sub-Index
moderated by 0.1 points to 58.4 last month, while the New Export Orders
Sub-Index is down by 0.9 points to 53.6.
■ The Sub-Index of Major
Inputs Inventory rose by 2.4 points last month to 51.4 points, the first
reading over 50 since May 2008. This shows that China has stocked enough raw materials
after months of strong imports since early 2009 and record domestic output
since early summer. In particular, the inventory survey confirmed our view that
the inventory for base metals is particularly high (inventory reading 62.9, the
highest among all 13 sectors surveyed) and a mini destocking cycle (reduced
imports) will likely last until at least the end of the winter.
■ Also, the Sub-Index of
Finished Goods Stocks rose by 2.0 points last month to 45.4.
■ In summary, the flattish
headline PMI seems to be boosted by higher inventory levels, while new orders
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 bear, a cyclical bull, 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.
■ Individual commodity sectors: On individual commodity sectors, we are now positive on the
copper, steel, iron ore, thermal coal, coking coal, uranium, molybdenum, corn,
DAP, and hardwood pulp sectors. We are neutral on aluminum, zinc, nickel,
potash, urea, wheat, 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 perspective.
■ Views on annual contract negotiations: We are looking for a 12.5%
rise 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.