Published by Na Liu of Scotia Capital today.
China Commodities Weekly for the Weeks of December 21 – January 1, 2010
Happy New Year
author of this report wishes all our readers a happy and prosperous New Year.
Your continued support for our China and commodities research is crucial to us
welcome our readers back from holidays, we offer a quick update of the Chinese
commodities markets in the last two weeks of 2009.
author of this report is tentatively scheduled to travel to China in January.
After today’s issue, publication of our China
Commodities Weekly will resume once the author
returns from China.
Commodities – A Quick
Chinese commodities prices were strong in the last two weeks of 2009, as
economic activity remained robust. China’s official PMI hit a 20-month high at
56.6 in December, up from 55.2 in November.
Coal – Icy Weather Hits
the snowstorm in November 2009, another major cold snap hit northern China
again over the past few days. Amid heavy snow, capital city Beijing registered
the coldest temperature yesterday in 40 years and all schools were closed in
Beijing and Tianjin.
■ The cold winter weather further tightened China’s
coal and natural gas markets. Thermal coal prices continued to rally; benchmark
Shanxi Premium Coal reached RMB820-RMB840/tonne at Qinhuangdao, up over 5% in
two weeks. In fact, all major grades of coal finished 2009 at their highest price
level at Qinhuangdao, China’s largest coal-handling port (Exhibit 1). On
December 28, inventory at Qinhuangdao dropped to just over 5 million tonnes,
the lowest level in two months. Inventory at power plants linked to the State
Grid is now at around nine days, inching closer to the warning line of seven
Iron Ore and Steel
■ With the news that India decided to levy the iron
ore export tax of 5%, local iron ore prices finished 2009 at the highest level
of the year. Indian 63.5% fines are quoted now over US$120/tonne, up about 20%
from early December. India, which supplies nearly a fifth of China’s iron ore
imports, increased the duty on iron ore fines to 5% from zero, while iron ore
lumps face a 10% duty from December 24, up from 5%.
■ The coke price also rose some RMB20-RMB70/tonne in
the last week of 2009.
■ Due to rising input costs like iron ore and coke,
Chinese steel prices rallied across board towards year-end. Average rebar
prices rose more than RMB200/tonne to RMB3,820/tonne since mid-December, while
average hot-rolled sheet prices also rose about RMB200/tonne to about RMB3,930/tonne.
■ Base metals prices rose across the board over the
last two weeks of 2009, tracking the rally on the LME. The good news is that
the Shanghai-LME price ratio has also improved slightly.
■ We note that Chinese aluminum smelters have agreed
to pay more for imported alumina in 2010. Term prices for imported alumina will
rise to 14.5%-15% of the LME aluminum price, versus 13.5%-14.5% in 2009.
Separately, Chalco just raised its spot alumina prices for the third time in
five months. From January 1, the Chalco price will be increased by 5.7% to RMB2,800/tonne.
■ On the fertilizer front, the BPC settlement of
US$350/tonne (delivered) sent a shockwave through the local Chinese market.
Almost all local industry contacts view the BPC settlement as lower than
expected and some local distributors have begun to fear a flood of low-cost
imported materials that may begin to hit the local markets starting
mid-February. Most purchasers halted or reduced buying immediately after the
BPC settlement news.
■ As we wrote in mid-December, the Chinese potash
market had been rallying strongly to over US$400/tonne right before the BPC
deal amid dropping port inventory and active purchases by NPK producers. This
is why we believe that BPC basically gave up at a time when the Chinese market
began to turn in favour of the suppliers, and the Chinese negotiators thus achieved
a home run by persistence and patience.
■ Local market participants are now debating the
near-term market direction without consensus. On the one hand, the BPC
settlement is much lower than prevailing spot market prices and, when imported
materials arrive, the local market will have to digest these low cost materials.
On the other hand, some observers say that as Sinochem and Qinghai Salt Lake
raised list prices just before the BPC settlement, a sharp price pullback is
unlikely, especially in the near term. Also, some observers believe that
Sinochem and Sino-Agri might control import volume to avoid flooding the local
market with cheap material, so the market could actually tighten up a bit into
the planting season. This would enable Sinochem and Sino-Agri to sell their
high-cost inventory from 2008 imports, and their low-cost newly booked 2010
■ In short, the local market is digesting the BPC
settlement news. Although the recent rally had suddenly ground to a halt, the
spot market did not crash to the new import parity price. Nominal wholesales
prices dropped only RMB50-RMB100/tonne, or about US$10/tonne, in the last week
of December. Average retail prices dropped RMB50/tonne in the same week to
■ On the global market, the Chinese settlement
remains the most important price-setting event, despite suppliers’ comments
that “China will become less relevant compared with Brazil and India for the
potash market.” We note that on December 28, Potash Corp. said it would cut its
U.S. Midwest price to US$390/tonne for the January 4-February 28 period from
US$515/tonne at present. With this move, Potash Corp. adjusted downward its
prices, essentially to reflect the lower China settlement.
■ In contrast to potash, urea and DAP prices continued
to rally in China. DAP prices, in particular, rose strongly at both the wholesale
and retail levels. Nationwide average retail DAP prices rose about RMB120/tonne
in the last two weeks of 2009 to over RMB2,730/tonne.
■ The market over the past two weeks supports our
long-held relative preference of the fertilizer sector in the sequence of DAP,
urea, and potash.
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:
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
■ 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.
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, 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$166/tonne from its 2008 level to US$410/tonne FOB.