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Msg  62261 of 65647  at  2/11/2010 10:45:44 AM  by


China Update

February 14, 2010 is Chinese New Years 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, bazaar, etc.

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.

Everyone is 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 Update

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 Home

Today, 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

A 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.

Trading 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.

The 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 significant volatilities.

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 bull” again.

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 tonnes.

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 Festival activities.

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.

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