■ So far this week, China's base metals, flat steel
products, iron ore, corn, fertilizers, ethylene, methanol, and coal prices have
been up; while long steel products, soybean, and oil products prices have been
flat. In early December, China's pulp & paper markets were flat to firmer,
with pulp, waste paper, and fully coated freesheet leading the gain.
Molybdenum – A Tax Cut and a Price Uptick
■ On Wednesday, the Ministry of Finance announced a
cut in the export tax in 2010 for molybdenum oxide and hydroxide to 5% from
15%; for molybdates to 5% from 10%; for molybdenum powder to 5% from 10%; and
for unwrought molybdenum to 5% from 15%. The ferromolybdenum export tax remains
■ As China is now a net importer, we believe the
lower export tax will only show its impact when China has a local surplus. In
recent days, however, the Chinese local molybdenum market has been actually
experiencing a modest rebound due to some increased purchases by steel mills.
■ We note that since December 1, molybdenum
concentrate is trading up by RMB50-RMB70/mtu, to 1,920 RMB-1,950 RMB/mtu this
week. Prices for ferromolybdenum have gone up RMB4,000-RMB5,000/tonne, to RMB130,000-RMB132,000/tonne
after several major stainless steel mills increased purchases. The market
seemed to be stabilizing at current levels during the past three sessions, as
activities have not picked up further ahead of the holiday season.
■ At current local price levels, we note that exports
out of China are not economically feasible even with the lowered export taxes.
Potash – Settlement Speculations
■ It has been a confusing time for the potash market.
After some long waiting on the part of the potash bulls, the local Chinese spot
prices finally turned up in recent weeks, amid sharply lower port inventories,
now below 1.3 million tonnes (although producer inventories remained well over
2 million tonnes). However, there was a sudden drop in Brazilian prices to
US$400/tonne, dampening market sentiment.
■ We had been cautious on the Chinese potash
settlement for a long time until last week, when we raised our China contract
price projection to over US$400/tonne FOB. Admittedly, this new projection is
much higher than market consensus now, which is probably in the range of US$320-US$370/tonne.
To be sure, we were fully aware of the prevailing local market prices when we
made the raise. This is what we wrote last week: “Average retail prices rose to
RMB2,890/tonne (US$423), up about RMB150/tonne week over week. Port quotations rose
some RMB60-RMB100/tonne to RMB2,700-RMB2,800/tonne (US$395-US$410)…. We expect
the local Chinese price will climb some RMB200/tonne more (or US$30/tonne more)
to top RMB3,000 at ports (US$439/tonne). As such, we have decided to raise our forecast
for the 2010 China import contract price to US$410/tonne FOB, up from US$395/tonne.”
■ Therefore, our new projection was not based on the
current market prices. We were trying to be forward-looking and base our
projection on a seasonally strengthening price trend in China.
■ The local market move this week supports our views
on local price direction. On December
11, Salt Lake Potash, China largest potash producer, hiked ex-factory prices by
RMB100/tonne to RMB2,500/tonne for 60% MOP. On December 15, Sinochem hiked its
port offers by RMB100/tonne across product lines. Russian 60% pink and white
MOP were offered at RMB2,950/tonne, Canadian pink offered at RMB3,050/tonne,
and Canadian white offered at RMB3,150/tonne. After the hike, mainstream port
prices have been offered at well over RMB3,000/tonne (US$439/tonne), although
real transaction prices have been somewhat lower.
Seem Ready to Give Up on Lower Brazilian Prices
■ In fact, we made the seemingly abnormal projection
raise last week on purpose: as we have repeatedly written recently, we believe
that any China settlement could trigger a tradable rally in the potash sector
as the Chinese settlement would be perceived as market bottom. It would remove
perceived downside risk and prompt buyers in other regions to increase
■ In our opinion, if suppliers can hold back for
another month, waiting for the Chinese local market to firm up further, we
think the settlement will still have a chance to top US$400/tonne FOB as we
projected. But if suppliers give up before year-end, as the Brazilian prices
recently indicate, the settlement will likely be well below US$400/tonne as the
current market consensus expects. Judging by recent comments from major
suppliers, the latter might well turn out to be reality, which is good for the
Chinese importers and users (and which is in line with our old views before last
■ Jim Prokopanko, CEO of Mosaic, said on December 8
that he expects China will agree before Christmas, or shortly after the New
Year, to buy potash for less than US$400 per tonne.
■ Overnight, BPC’s sales chief Oleg Petrov said talks
with Chinese buyers would take place next week and that a deal could still be
struck by year-end. “It’s important to have a contract with China in place,
because the first quarter is the most active period of consumption in China,”
he said. He declined to
specify a target price, but said it could possibly be lower than the current
global spot price. He
confirmed to Reuters the recent Brazilian sales by stating: “We are currently
selling to Brazil at US$400 per tonne CFR and we see no reason why this price
should erode.… There will not be a full recovery in 2010, but the market will be
much better than this year. The Chinese contract will be extremely important
for this recovery, as it will help restore market confidence and help to boost
■ BPC also said it may look to settle deals with
China on a spot basis from 2011, replacing annual contracts, to reflect the
growing influence of Brazil and India in world markets. “The role of China as
the price-setter for the world is changing. This (potential 2010 settlement) could
be the last year,” Petrov told Reuters. “With (Chinese) domestic production
growing, it will not buy as much potash as India or Brazil.… The increasing
role of Indian and Brazilian markets might prompt BPC to give up long-term
contracts with China and switch to spot deliveries, starting from 2011....
China will always lack material. It will continue to buy potash, but it will
not be the biggest market for imported potash. It is already going head-to-head
with Brazil and India.”
■ Petrov estimated Chinese potash inventories had
fallen to about 3.0 million tonnes from between 4.5 million and 5.0 million
tonnes a year ago. In peak years, China consumed 10 million to 11 million
tonnes of potash annually. It can now produce about 5 million tonnes domestically
and could potentially raise this to 6 million to 7 million tonnes, he said.
Brazil, on the other
hand, expects a demand boom in 2010. Of the approximately 7 million tonnes that
could potentially be consumed, about 6.3 million tonnes may be imported, Petrov
Macro – November Data
■ Last Friday, China released its November
macroeconomic data. Interestingly, although most of the data are not in line
with consensus, the overall market impact was quite neutral.
■ On the growth side, industrial production (IP) grew
19.2% YOY in November, higher than economists’ consensus of 18.2% and October’s
16.1%. This stronger-than-expected IP number is offset by weaker-than-expected
retail sales growth and fixed asset investment growth. In November, retail
sales grew 15.8% YOY, weaker than economists’ consensus of 16.5% and October’s
16.2%. Fixed asset investment grew 32.1% year-to-November, lower than the 33%
growth seen in year-to-October.
■ On the inflation side, both CPI and PPI are higher
than expected. In November, CPI increased 0.6% YOY, compared with -0.5% in
October and economists’ consensus of 0.4%. It is worth noting that this is the
first positive CPI reading in 10 months. We note that the Chinese government
has recently added “managing inflation expectations” to its top policy priorities,
in addition to “maintaining economic growth” and “making adjustments to economic
■ Monetary data show that Chinese banks issued RMB294.8
billion of new loans, higher than market expectations of RMB250 billion. M2
money supply grew 29.7% YOY year-to-November, also higher than economists’
consensus of 29%. These monetary data show that liquidity is ample and flowing
Commodities – November Data
■ On the commodities side, both output and import
data were very strong in November. This combination has dual implications: on
one hand, it implies that underlying demand remains robust; on the other hand,
however, it shows that local supply is very ample.
■ Base metal output is extremely high, with copper,
aluminum, and zinc output all hitting new monthly records. China produced
420,700 tonnes of refined copper in November, up 5.4% month over month (MOM)
and 20.4% year over year (YOY); 1.355 million tonnes of aluminum, up 7.5% MOM
and 33.5% YOY; 444,800 tonnes of refined zinc, up 9.8% MOM and 40.8% YOY; and
21,606 tonnes of refined nickel, up 13.3% MOM and 0.8% YOY.
■ In November, China produced a record 288.94 million
tonnes of coal, up 5.8% MOM and 26.8% YOY. The strong coal output is absorbed
by the even stronger electricity output. In November, China’s power generation
surged 26.9% YOY, the sixth yearly rise in a row and the fastest YOY growth in
nearly four years. The exceedingly strong power generation was entirely
attributable to output growth from thermal power plants. Coal-based generation surged
38.8% YOY in the month while output at hydropower plants dropped 23.3% YOY. We note that the severe snowstorm in November must
have had a very big impact on China’s heating demands, power generation, and
coal consumption in the month. The good news for the coal bulls is that the
damage had already been done – as a result of the snowstorm, coal inventories at major power
generators had been drawn down to relatively low levels (on average 12 days of
use) and will likely remain low into the winter, unless the weather warms up
unexpectedly. We note that thermal coal prices have continued to move higher so
far this week.
■ In November, China produced 47.26 million tonnes of
crude steel, or 1.575 million tonnes a day, down 5.6% from 1.669 million tonnes
a day in October. The lower steel output in November confirms our view that
construction activities moderated a bit in November due to the adverse weather.
On the input side, in November China’s iron ore output grew 3.5% MOM and 16.9%
YOY to a new record of 86.78 million tonnes while China’s coke output grew
59.6% YOY but down 0.7% MOM to 31.31 million tonnes.
■ On the trade side, China’s imports grew 26.7% YOY
in November while exports dropped 1.2% YOY in the same month, resulting in a
trade surplus of US$19.1 billion. It should be noted that the 26.7% YOY import
growth put an end to the 12 straight months of import declines brought on by
the global financial crisis.
■ Most commodities imports surprised on the upside.
November copper imports, including semis, rose to 290,158 tonnes from 263,109
tonnes in October; aluminum imports rose to 120,674 tonnes from 86,611 tonnes
in October, and iron ore imports rose to 51.07 million tonnes from 45.47
million tonnes in October. The only disappointment was on oil. China’s November
crude oil imports totalled 17.12 million tonnes or 4.17 million barrels per day
compared with 19.34 million tonnes (4.55 million bpd) in October.
News in Brief
Adding 70 GW in 2010
■ China will add 70 gigawatts (GW) of new installed power
capacity in 2010, the China Electricity Council (CEC) forecast on December 11.
The CEC projected that 60% of next year’s new installed capacity will be
thermal power. In particular, the Chinese provinces of Shanxi, Liaoning,
Jiangsu, Fujian, Henan, and Guangdong will witness large increases in thermal
power installed capacity.
■ Meanwhile, the water-rich provinces of Yunnan,
Sichuan, and Hubei will see substantial increases in hydropower installed
capacity. And wind power will make up much of the new installed capacity in the
wind-rich provinces of Jilin, Liaoning, Jiangsu, Gansu, and the Inner Mongolia
Autonomous Region, the CEC said.
■ The CEC estimated that China’s total power
installed capacity will grow to 850 GW by the end of 2009, up 80 GW, or 10.39%,
from that in 2008.
Urea and DAP –
Lower Export Tax in Off-season
■ China lowered the off-season export tax for urea
and DAP to 7% from 10% in 2010. The on-season (or planting season) export tax
has remained at 110%. For urea, the on-season is now defined as: February 1-
June 30 and September 16-October 15. For DAP, the on-season is now defined as
February 1-May 31 and September 1-October 15. Compared with actual practice in
2009, the on-season, during which the high 110% export tax applies, is reduced by
half a month for both urea and DAP in the second half of 2010.
■ We observe that these changes are only mildly
negative for the urea and DAP sectors. The 3% reduction in the export tax for
urea is too small to offset the much higher coal and natural gas costs over the
near term. The extension of the export window will likely only show its impact
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 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$166/tonne from its 2008 level, to US$410/tonne