2010 is Chinese New Year’s Day.
Happy New Year
to everyone. Though we live outside of China, and do not have the festival
spirit here as in Asia, if you go to Chinatown in your area you may see some
celebrations going on in the form of lion dance, people shopping and dining,
In Asia, it is
celebrated in China, Taiwan, Hong Kong, Malaysia, Singapore, etc as the most
important festival in the year. They celebrate it more actively, more so than
the Christmas – New Year in the west.
supposed wear new clothes and visit their relatives in the city, pay respect to
parents/granparents, uncles and aunts, and give money in red envelops to
unmarried youngsters of your own and relatives’ family.
China Commodities Weekly for the Week of
February 8-February 12, 2010
■ This week, China's base metals prices were up;
steel, iron ore, grain, and oil prices were flat; and ethylene, methanol, and
coal prices were down. In early February, China's pulp and paper markets were
strong across all products.
Happy New Year of the Tiger!
The Irresistible Journey
China experienced the peak of the railway traffic for the largest annual
migration of people on the planet. 5.2 million people boarded trains to go home
in the past 24 hours, up 5% year over year (YOY). During the 40-day spring
festival shipping season, 210 million people are expected to take trains, up 18
million YOY, indicating the rebounding of economic activities versus the same
time last year. Most of the travelers are migrating workers, who usually travel
to their rural families once a year, during the Spring Festival, to have a
reunion with their children and parents. We note that in a large area of
Northern China and mid-China, a cold snap with increased snow and rain will
complicate the rail and road transportation. Instead of discussing the
implication for thermal coal, we wish all the travelers a safe journey home
amid the snow.
The Spring Festival
few clients have asked us about the official holiday arrangements for the Spring
Festival in China. Officially, all Chinese financial markets (stock, futures,
and major spot markets) will close from February 13-21. Trading will resume on
February 22, 2010.
volume on Chinese spot commodities markets has already dried up and is expected
to come to a complete halt at the end of this week. Trading will only pick up
gradually into the end of February.
rest of this month will also be light in data releases, as the National Bureau
of Statistics (NBS) will not release January industrial production, fixed asset
investment, and retail sales data, due to the distortion of the Spring Festival. The NBS will release the combined
data of January-February on March 10 at 9:00 p.m. EST.
■ Chinese inflation data and monetary data for
January are expected in the next two days. February PMI data is due February 28
at 8:00 p.m. EST. The Year of the Tiger
■ From a Feng Shui perspective, which we do not
believe in, the coming (Gēngyín) year is
characterized by a yang metal from the heavenly stem sitting on top of a wood
tiger from the earthly branch. Based on the Chinese Cycle of Birth and
Destruction among the Five Elements (wood, fire, earth, metal, and water),
metal destroys wood. Therefore, the coming year is somewhat disturbing, as we
have metal sitting on top of wood and metal destroying wood, meaning we have a
conflicting relationship between heaven and earth. Moreover, yang metal
symbolizes a metal weapon, while the tiger is also a symbol of animal ferocity.
Historically, this has meant clashes and fighting, and the last time we saw
this situation 60 years ago, the Korean War started on June 25, 1950, involving
both China and the U.S.
■ As there is conflict between the heavenly stem and
the earthly branch in the coming Year of the Tiger, volatility could be the
feature of the year for the financial markets. The absence of fire, the element
that dictates speculative heat in the market, means this year might not be an extremely
bullish year. Most Feng Shui masters only look for a modest gain this year amid
■ In terms of sector implications, the lack of both
fire and water means the energy sectors might go to the sidelines. The metals
sector looks somewhat better, particularly in the spring. As we mentioned, metal destroys wood, and
given the absence of earth, the pulp and paper sector and the agricultural
sector might face pressure.
■ Even though we do not believe in all of the above
Feng Shui themes, we still would like to wish our readers a safe and profitable
year of trading amid potential volatilities.
When to Buy?
■ As our call for a severe pullback in January and
February has largely played out, many clients have asked our opinion about the
timing of “buying the dip,” or in our words, when we will become a “seasonal
■ First, if history repeats itself, and what happened
to the raw materials sectors back in 2004, when China first tightened in the
last cycle (as we discussed in our report dated January 28, 2010) reoccurs,
70%-80% of the damage of the current correction might have been done in terms
of magnitude, but the duration of the pullback might have not been long enough.
The pullback in 2004 lasted at least two months. Therefore, we believe that the
current correction might continue in the rest of February in the form of
consolidation at the current, or a little lower, level. This is in line with
our view that before the end of the Spring Festival, the Chinese market will be
quiet and provide few near-term catalysts for the sectors.
■ Second, we note that there is a high possibility of
post-Spring Festival disappointment. Many bulls in the raw materials sectors
have very high hopes for the post-Spring Festival rally. The ideal scenario for
them is that after the 10-day-long holiday, the Chinese traders and end users come
back to work. Facing a surge of construction activities in the spring, they
begin to place orders for large volumes of raw material imports. We believe
this is somewhat unlikely this year for two reasons. First, as we discussed in
our recent publications, inventories for key commodities like steel, copper,
and oil are on the high side now in China and should be sufficient for the
initial construction boom in the spring. Second, policy risks are perceived as
high post-Spring Festival, as many economists in China believe that the central
bank is waiting for the end of the festival to announce an interest rate hike
or another reserve ratio hike. Therefore, traders might well choose to de-stock
in early spring and wait for more clarity of policy and the direction of the
economy. If this happens, even if the construction activities pick up strongly
in the early spring, as we expected, a de-stocking phase might defer Chinese
traders’ import interests.
■ In view of the above two points, we would wait for clearer market signals to call ourselves
a “seasonal bull” again. Ideally, we would like to see construction data pick
up, copper and steel inventories begin to drop, and the import economics to
improve (for example, the Shanghai-LME copper ratio to rise). In our opinion, the fundamental bull case for the
global raw materials sectors, i.e., the spring construction boom driven by infrastructure
building and homebuilding, remains intact from a China perspective. The for the
rally is now more a moving target to be determined by the inventory level and
the strength of the construction boom.
■ Overnight, China released its January preliminary
trade data. The data show that the mentality of “de-stock and wait and see” is
already there, as China’s key commodities imports were down meaningfully in
January on a month-over-month basis. For January 2010 versus December 2009,
respectively, copper imports, including semis, were 292,096 tonnes versus
369,368 tonnes; copper scrap imports were 340,000 tonnes versus 444,000 tonnes;
aluminum imports were 97,633 tonnes versus 117,016 tonnes; iron ore imports
were 46.62 million tonnes versus 62.16 million tonnes; crude oil imports were
17.11 million tonnes (4.04 million bpd) versus 21.26 million tonnes (5.02
million bpd); and soybean imports were 4.08 million tonnes versus 4.78 million
■ The good news is that as imports slow,
local inventory is drawn. Local traders told Reuters that the copper inventory
at bonded warehouses was down some 50,000 tonnes in January to about 150,000 tonnes.
Happy New Year of the Tiger
■ At the end of this report, we would like to wish
all of our readers a happy and prosperous Year of the Tiger. Our publication
will resume the week of February 22-26, when we will update the post-Spring
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, iron ore, thermal coal, coking coal, uranium,
molybdenum, corn, DAP, urea, potash, and hardwood pulp sectors. We are neutral
on aluminum, zinc, nickel, steel, 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 25% rise in the 2010 annual iron
ore contract. We expect the 2010 benchmark Australian hard coking coal price to
settle at US$185/tonne, up from US$129/tonne in 2009.