This is the amount in tonnes of additional iron ore that the World needs through 2019, according to the number two player Rio Tinto – which neatly breaks down to an average 100 million per annum for eight years; and I certainly hope so. Good job then (and not talking its own book at all) that Rio’s Simandou iron ore project in Guinea is on track to make its first shipment by mid-2015. Note, too, that this is a joint venture with Chinalco, aka the Aluminium Corporation of China.
- Non-traditional
In case you had forgotten, China is the World’s largest iron ore consumer and, it follows, the number one national in steel. This means, too, that it must source product from both traditional (Australia, Brazil and South Africa) and non-traditional sources (everywhere else, including Guinea).
For the record, too, (the wonderfully named) Xu Xu emphasised this at a recent conference. He is Chairman of - wait for it – ‘the China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters’ and said that in H1 2011 iron ore imports from countries other than Australia, Brazil, India and South Africa reached 64.63 million tonnes. This is 19.3% of total imports and up some 4% from a year ago. Xu also went on to say that this rising share indicates that the traditional position of Australian and Brazilian miners, in particular, is being challenged.
Furthermore, China continues to look more at the likes of Peru, Chile and Canada where it should actively develop strategic relationships with iron ore exporters, he said. The same goes for Russia, Vietnam and Kazakhstan. Xu added, that the proportion of Indian ore imports to China reduced by almost 15% in H1 - the largest proportional decline in 13 years. Domestic constraints on mining are a factor here. Nor should China’s domestic iron ore production be forgotten and, in the first seven months to end July, it rose 22% to 691.9 million tons.
- August prices rise
Whether traditional or not, the price of iron ore imports continues to ignore what is happening in World bourses - and tonnage for August delivery rose to the highest level since 6 May ($191.90), according to The Steel Index. This means that 62% iron ore fines ended the month at $179.9 per ton in Tianjin.
Similarly, trading in iron ore swaps climbed 50% to a record in August, according to The Steel Index. Investors bought and sold derivatives corresponding to more than 6.5 million metric tons, up from 4.3 million in July, and worth a nominal value of $1.1 billion. Meantime, in the period January to July, says CISA (the China Iron & Steel Association), the average price of iron ore imports gained 37.8% to $162.7 per metric ton. Unsurprisingly, too, this added Yuan 137 billion in costs to the Chinese steel industry.
- Steel margins
In turn, the profit margin of 77 large and medium Chinese steelmakers was just 3.08% in the first seven months of this year, down 0.1% from a year earlier, added CISA. It also described steel making as a high cost, low profit sector compared with the industry in general where the average profit margin is 5%.
However, for his part, Baosteel’s General Manager, Ma Guoqiang Ma says that the Sector was still facing risks from the growing “financialisation” of iron ore prices and the Company is still looking to resolve the monopoly of supply by investing in overseas iron ore mines at a proper time. He also expected little opportunity for steel prices to rise or fall significantly in Q4 - due to still high iron ore prices and the lack of remarkable growth in steel demand.
- CISA's iron ore price index
In order to keep better track of raw material prices, though, CISA will begin publishing a weekly iron ore index on 1 October. “We are able to collect data from all domestic mines and 35 ports nationwide” said Luo Bingsheng, Deputy Party Secretary of the Association, which represents China’s 77 biggest mills. He was speaking at a conference. Quarterly iron ore prices are usually based on figures derived by deducting freight costs from the three month average of daily iron ore indices compiled by Platts, The Steel Index and Metal Bulletin with a one month lag period.
Steelmakers, including Baoshan, China’s largest listed producer, typically use Platts. “It isn’t mandatory for steelmakers to replace other price indicators” said Luo. “But an index launched by the steel association will be well received by its members”. Nonetheless, the Association’s index, which will consist of domestic and import prices, will “more truthfully reflect China’s market reality and guide orderly imports”, added CISA Vice Chairman Zhang Changfu.
- Partnerships
One way to ameliorate the situation is to work together and the World’s number one in steel, ArcelorMittal and Hunan Valin, China’s number 10 producer, will accelerate a strategic partnership for the production of high end steel products in China plus a target lowering of HV’s costs and an initiative on better purchasing of its iron ore. The two will also push ahead with new auto sheet and electrical steel projects. For good measure, too, AM owns a touch under 30% of HV, which is listed in Shenzhen and is 40.01% by Hunan Valin Group. This latest announcement also comes very quickly after CISA and the local securities regulator in Hunan said that AM had failed to fulfil its commitments to HV. In addition, AM agreed to sell its 12% stake in an auto sheet joint venture with Baosteel and Nippon Steel to the Japanese firm so as to be free to focus on its work with HV.
- Shipping bottom
In the less good news department, Lorenzten & Stemoco says that the slump in dry bulk shipping rates may have ended. This comes after Rio Tinto paid the year’s highest rent ($10.30 per metric ton) for a capesize vessel to carry iron ore to China from Australia. Indeed, the rate paid is 31% more than on 2 August, says the Baltic Exchange and is the highest since 11 November. Furthermore, the number of contracts used to hedge capesize rents for Q4 of this year has jumped 42% since end August and forward freight agreements, by value, have added as much as 13% (to $18,925 per day), according to Clarkson.
Similarly, US investment bank, Dahlman Rose, says that hire costs of capesize ships will rise by a further 25% as exports from Brazil to China drive prices up. That said, trading in freight derivatives, used to bet on the cost of shipping raw materials such as coal and iron ore, fell 13% last week to 27,318 from a 19 month high according to Oslo-based NOS Clearing, Singapore-based SGX AsiaClear and London’s LCH.Clearnet.
The global steel industry is the single most important customer of dry bulk shipping, with iron ore, coking coal and steel products accounting for 51% of seaborne trade, estimated at 3.56 billion metric tons for 2011, according to DVB Bank. What is more, a total of 1,267 capesize ships comprise 40%, by number, of the global dry bulk fleet of 8,603 vessels, according to Clarkson. But too many new ships were ordered when rates boomed and this depressed hire rates; and, while there has been some recovery, Bank of America Merrill Lynch says that demand is unlikely to catch up with supply until 2014.
However, iron ore shipments booked in capesize vessels tracked by Clarkson reached the highest monthly tally of this year in August at 76, which compares with 58 in July, and 71 in June. For the record, too, some 70% of the forecast exports of 1 billion tons of iron ore in 2011 will be shipped from Brazil and Australia, according to Clarkson.
- Valemax
The World’s largest exporter of iron ore is in talks with Chinese shipping companies to operate its new, massive iron ore carriers under long term contracts as they run from Brazil to China. However, China’s largest shipping companies are lobbying the Government to stop Vale and its plan to build a $2.3 billion fleet of the World’s largest carriers. Similarly, Chinese regulators have not yet approved any of its ports to harbour more than 300,000 dead weight tons for dry bulk carriers because of safety and environmental concerns; Valemax’s weigh in with a gargantuan capacity of some 400,000.
- Brazil, Afghanistan, Nigeria and Cockatoo Island
Brazil’s iron ore shipments in August reached the highest level (32.5 million metric tons) in more than three years and are up by 8.9% on the same month last year.
In the same country, a Chinese consortium (including Baosteel and CITIC) has bid $1.95 billion for a 15% stake in global leader in niobium. Companhia Brasileira de Metalurgia e Mineracao has an 82% share of the global market for niobium which is one of the five major refractory metals (with high resistance to heat and wear). It is used with iron and other elements in stainless steel alloys and also with a variety of nonferrous metals, such as zirconium. Niobium alloys are strong and are often used in pipeline construction, jet engines and heat resistant equipment. Niobium is also used for jewellery and, at cryogenic temperatures, is a superconductor. Posco, Nippon Steel and others hold another 15%.
Meantime, in Afghanistan, the Steel Authority of India and JSW Steel are among seven Indian steel and mining companies which are bidding jointly for the Hajigak iron ore mines, it is reported. Reserves here may be as large as two billion metric tons of iron ore with a capital budget of some $3 billion over 30 years.
Then, down in Nigeria, Reuters says significant production should begin at the Itakpe iron ore deposits next year. Reserves are reported to be three billion metric tons with an initial annual output target of two million tons.
Not forgetting Cockatoo Island (“only in Australia”), where Pluton Resources has signed a deal with US-based Cliff Resources and its joint local partner to acquire these iron ore assets in the Kimberly region of Western Australia. The consideration is reported to be that Pluton will assume liabilities for environmental rehabilitation of the island. At this time, production is said to be approximately 1.4 million tons of high grade iron ore fines per annum.
- Chapter 11
Finally, Iron Mining Group Inc has filed for reorganisation relief under Chapter 11 in New York due to a dispute with its senior secured lender, Globe Speciality Metals. That said, its foreign subsidiaries continue to conduct business as usual and have contracts to export 480,000 million tonnes of iron ore by the end of 2011. IMG is a global iron ore trading group with direct mining operations in Chile and Mexico, where it owns a number of iron ore projects in various stages of development. China is its prime destination focus as the Nation looks to non-traditional sources.
Monday 5 September 2011
Wednesday 31 August 2011
Iron & steel weekly: BHP and other stories
Bestriding the week like the colossus that it is, BHP produced a sparking set of full year figures - with net profit up 86% to almost $23 billion and a margin of 33%. In the supporting cast (of thousands), the Chinese steel industry showed it was no slouch either and daily production rose further (okay by just 0.26%) in the second 10 days of the month (CISA’s choice) just as it did in the first (+0.4%). In fact, in the 23 ‘official’ 10 day trading periods of 2011, daily production has risen on 15 occasions. In the latest period, too, the key driver was the expectation of stronger demand from construction in the autumn.
Elsewhere, iron ore prices continue to ignore the World’s economic travails and, last seen were up a touch at $177.9 delivered in China (on 23 August) said Steel Index. Similarly, BHP noted that the spot price for iron ore is trading at close to $178 per tonne, which is not far off the record $191.90 touched in mid-February; and nearly triple the price in late 2008, thanks to booming Chinese demand. The Group also added that it continues to favour long term iron ore supply contracts in its trading.
But this has not done any favours for the profits of China’s listed steelmakers and when 27 of them released their H1 results on Monday, after the market had closed, their combined net profit showed a slump of 16% year-on-year to Yuan 9.98 billion ($1.56 billion), according to Wind Information. And, 16 of them reported lower profit margins. Similarly, Mysteel said “the steel industry will continue to suffer great pressure during the second half of this year”. Not that this stopped, Baosteel taking 51% of middle-sized steelmaker Shaoguan Steel in Guangdong province as part of the Country’s steel restructuring plan. Okay, it was a free transfer on this occasion.
Elsewhere, Taiwan’s China Steel will raise prices 1% in October/November, while capesize freight rates have risen 26% since 1 July as Japan rebuilds. Meantime, in India, Sesa Goa continues to be restrained by Indian Government iron ore mining restrictions, while in Canada the Quebec Government has announced an $80 billion regional development plan focused on attracting Japanese and Chinese natural resource investors to the region.
Further south, USIM, Brazil’s number two steelmaker is looking to quadruple its iron ore production, and would very much like to win the auction for a new $1 billion port terminal to be built in Rio de Janeiro State. Then, moving east, South Africa’s Assore has doubled its 2011 net profit to $440 million, principally on iron ore.
Down under in Australia, Peabody Energy and ArcelorMittal have increased their joint takeover offer for Macarthur Coal by 3% to A$4.9 billion ($5.2 billion) - and it has been accepted. Macarthur is the World’s largest producer of pulverised coal which is used as a replacement for coke in the production of pig iron. Note, however, that Citic Resources, which owns 24.5 % of Macarthur, has made no comment thus far. However, the offer from P/AM only needs 50.1 % of acceptances.
Finally a lot seems to be happening in Russia where its largest steelmaker, Severstal, has just reported that Q2 net profit had more than tripled from $192 to 602 million; it also enjoyed a 47% EBITDA margin. Steel makers in Russia, the World’s fifth largest producer, are benefiting from being low cost producers, but the vertically integrated companies are showing the greatest year-on-year improvement. For example, MMK, Russia’s third largest producer, saw its Q2 net profit fall from $53 to 13 million.
In addition, IRC, a Hong Kong-listed iron ore company mining in Russia, posted its first ever profit after commencing sales from its Kuranakh mine; prices were also higher. Net income for the six months ended 30 June was $3.6 million, compared with a loss of $51.9 million a year earlier. Revenue, meantime, increased to $60.4 million from $5.2 million a year earlier.
And last but not least, Fleming Family & Partners, a UK private equity firm, may invest $2 billion to develop iron ore deposits in the Chelyabinsk region of Russia.
“The finest steel has to go through the hottest fire”
- John N. Mitchell
DETAIL
- China’s daily steel output increases slightly (+0.26%) in the 10 days ending 20 August, says CISA
China’s daily crude steel output stood at 1.947 million tonnes in the period from 11 to 20 August, which is an increase of 0.26% from the previous 10 days, as plants plan to take advantage of an expected revival in demand in the autumn, says the China Iron and Steel Association. This is also the second consecutive ten day period in which it has done so. And, in the year to date there have been 23 ‘official’ 10 days trading periods and on 15 occasions daily production rose.
"China’s overall investment in construction projects has remained aggressive this year which is the driver behind steel production” said Smart Timing Steel. It is also the case that steel mills benefited from a robust level of construction actvity even during the summer, when it normally slows down i.e. daily steel output has remained close to the record of more than 2 million tonnes set in the last 10 days of June. Similarly, daily steel output has stayed above 1.9 million tonnes since February, up from an average of about 1.7 million tonnes last year. “The next two months are normally the last opportunity for large sales for steel mills as demand traditionally picks up and pushes prices higher” said Anshan Iron & Steel. In addition, China's major steel companies have all raised main product prices for September sales.
- China steelmakers’ profits weaken as iron ore prices rise
China’s steelmakers saw their profits sharply reduced by higher iron ore prices in the first half of 2011. For example, 27 listed Chinese steel producers released their H1 results on Monday, after hours. Their combined net profit slumped 15.7% year-on-year to Yuan 9.98 billion ($1.56 billion), according to Wind Information. And, of the 27 listed steel companies, 16 reported lower margins.
In the first half of 2011, China imported 334 million metric tons of iron ore, 8.1% more than a year ago, says the NBS. And, the average price rose by 42.4% year-on-year to $161 per metric ton.
Meantime, China’s steel output grew by 9.6% year-on-year in H1 to 350 million metric tons, but the industry’s profit margins dropped to 2.42% in the first five months, the lowest in many years, according to the Ministry of Industry and Information Technology (MIIT). It attributed this weaker profitability to rising iron ore prices.
Similarly, Mysteel said “the steel industry will continue to suffer great pressure during the second half of this year”.
This included China’s largest listed steelmaker, Baosteel, which saw net profits fall 37% to Yuan 5.08 billion ($796 million). It was particularly affected by lower demand from the auto industry. Q3 profits are also expected, by the market, to be lower.
- Baosteel acquires 51% of Shaoguan Steel
Baosteel Group will take a 51% stake in a middle-sized steelmaker Shaoguan Steel in Guangdong province as part of the Country’s steel restructuring plan. The free transfer of the stake is still subject to approval from State Assets Regulator.
Baosteel Group, the second largest manufacturer by output, agreed to set up a joint venture named Guangdong Steel Group in mid-2008. It controlled 80% with Guangzhou Steel, while Shaoguan owned 20%. Guangzhou Steel and Shaoguan Steel, both owned by the Guangdong provincial government, will also withdraw their stakes from Guangdong Steel Group.
- Taiwan’s China Steel raises October and November prices by an average 1%
Taiwan’s largest steel producer has said that it will raise domestic prices for October and November by an average 1% from September, principally due to higher commodity prices.
- Shipping rates rise as Japan rebuilds; with capesize up 26% since 1 July
Shipping rates for dry bulk vessels are being boosted by rebuilding efforts after the Japanese earthquake and tsunami increased imports of iron ore and coal since July, according to Lorentzen & Stemoco. “From our perspective, the market is better positioned for a recovery now than at any time during the last three years”.
Hire costs for capesize vessels have risen 26% since 1 July, adds the Baltic Exchange. Similarly, through 24 August, it notes that the cost to hire capesize vessels (which haul iron ore and coal) have climbed for 11 consecutive day to the highest level this year. For example, average daily capesize rents hit $19,010 last week, the most expensive since 24 December. Rents for the ships - which account for 40% of dry bulk fleet capacity - have rallied this month as higher commodity exports helped relieve a vessel glut. The surplus caused average rents to collapse to the lowest level since 2002 in Q1 and Q2 of this year.
However, trading in forward freight agreements, used to hedge the cost of shipping dry bulk commodities by sea, suggests rates may be peaking, according to RS Platou Markets. For example, October-to-December capesize contracts last week were trading at $14,500 to 14,700 per day.
That said, some spot voyage prices for capesize have soared to over $40,000 in recent days as, says Dahlman Rose, the cost of iron ore produced in China was higher than imports for the first time in the current year.
- BHP Billiton sees 2010-11 net profit rise 86% to $23.6 billion
The World’s largest mining company’s annual net profit rose 86% to $23.6 billion on the back of dramatically higher prices for iron ore and copper; market expectations were clustered around $22 billion. Revenue, meantime, for the year was up 35.9% to $71.7 billion which meant a spectacular lift in margins from 24.1 to 32.9%.
BHP said the strong performance was the result of rising prices for its key commodities which reflected high levels of demand from emerging markets such as China - and tight supply. BHP also said that it expects “robust demand” in the short and medium term, but warned that cost pressures could hurt its earnings further out.
The Company added that it expected weak growth in Europe and the US. That said, recent turbulence had not significantly dented demand overall and the Company said it continued to see a strong outlook longer term, underpinned by emerging market demand and barriers to the expansion of supply as miners are hit by funding constraints and labour and equipment shortages.
“The junior (producers) will once again not bring on the volume growth that is being fed into analyst forecasts”, said CEO Marius Kloppers. The constraints squeezing these junior suppliers are likely to prompt deals, but BHP will focus on base metals, oil and gas and potash - sectors where any deals are less likely to face regulatory hurdles. “The balance sheet has capacity for sizeable acquisitions. Opportunity has always been the limiting factor”.
Turning to costs, BHP said labour and equipment increases cut earnings by $1.2 billion in the year to June. Nor did currency help and the weakness of the US dollar against the Australian dollar, together with inflation, took a $3.2 billion bite out of full year operating profit. That said, BHP said it was “congenitally” opposed to currency hedging. “The prices rises that we have seen on the revenue side lag between six and 12 months, and we were going to see them on the cost side in due course”.
Costs excluding inflation and currency movements rose 5% in the year to June, compared with zero growth the year before. However, Kloppers declined to give a forecast for 2012, although they are expected to increase.
Nonetheless, “we remain positive on the longer term outlook for the global economy. Over the past decade, emerging economies have contributed more to global growth than the developed world and we expect their share to expand as the process of urbanisation and industrialisation continues”.
- BHP says it will stay with long term contracts for iron ore
Turning to iron ore, the World’s number three supplier said it was linking the majority of its sales to monthly average spot prices but continued to negotiate long term contracts for supply volumes. This after, it led a drive in 2010 to disband a 40 year old system of pricing iron ore once a year - in the face of opposition from customers in China. Kloppers also said that on a FOB basis, BHP’s sales were running “very close” to record high prices. Note, too, that iron ore is its largest division and income here last year soared by 122% to $13.3 billion.
- Sesa Goa says Indian iron ore mining has impacted performance
Sesa Goa, which is owned by Vedanta, has said that its performance will be affected by an order from India’s Supreme Court extending a ban on mining to two more districts of the key iron ore producing regions of Tumkur and Chitradurga in the southern Indian state of Karnataka. The two account for some 7% of India's estimated 213 million tonnes of annual iron ore output and the ban could impact exports from the World’s third largest supplier.
- Quebec seeks to attract Japan and China to invest in $80 billion regional plan
Companies from Japan and China are considering investing in an $80 billion regional development plan - “Plan Nord” - in Canada’s resource-rich Quebec province, said Premier Jean Charest; with the focus on iron ore, rare earths and lithium deposits, as well as in infrastructure. Xstrata (nickel) ArcelorMittal (iron ore) are already there and the Chinese are reported to be “very interested” in iron ore (and the CICC has an office in Toronto).
ArcelorMittal is also on record (May 20) as saying that it will spend $2.1 billion to expand its Quebec iron ore facility and Xstrata, earlier this month, said it would invest a further $510 million in its nickel mine in the Province.
Quebec has also set aside $500 million (over the next five years) to purchase equity in new mining projects; but would not seek controlling holdings.
- USIM intends to bid for new Brazilian port site as it aims to quadruple iron ore output
Usinas Siderurgicas de Minas Gerais (USIM), Brazil’s number two steelmaker is looking to quadruple its iron ore production, and would very much like to win the auction for the site of a proposed $1 billion port terminal in Rio de Janeiro state.
The State government will ask for bids later this year for a lease on the so-called Area do Meio, which covers some 245,400 square metres, from companies which plan to ship the ore, Brazil’s largest export. At this time, too, USIM does not own a dedicated iron ore port facility. And, the capacity of Area do Meio will initially be 25 million metric tons per year, with capacity to expand to 44 million. Other bidders may include CSN, the third largest Brazilian steelmaker and MMX Mineracao & Metalicos.
Brazil, the second largest exporter after Australia, will boost its output to 771.5 million metric tons in 2015 from 372 million in 2010, according to estimates from the Brazilian Mining Institute. Last year, some 84% of Brazil’s iron ore output was exported for a total of $29 billion, with China buying 45% of it.
USIM's mining unit, Mineracao Usiminas, controls four mines in the Serra Azul region of Minas Gerais; and Sumitomo bought 30% of the unit for $1.93 billion last year. USIM exported 526,000 metric tons of iron ore in 2010, less than 8% of its total production, through a terminal in Itaguai operated by CSN and next to the Area do Meio. It is also reported that USIM may team up with ArcelorMittal.
Note, too, that USIM is 27.8% (voting shares) owned by Nippon Steel; and during 2011, CSN has built up a stake of some 10% in its domestic rival.
- South Africa’s Assore doubles net profit to $440 million
The South African miner said that net profit for fiscal 2011 more than doubled to Rand 3.2 billion ($440 million) on increased demand and higher prices. Sales, meantime, rose 48% to Rand 11.2 billion which meant a first class shift in profitability from 19.8 to 28.6%.
Assore, with partners, spent Rand 2.8 billion to develop infrastructure at the Khumani Iron Ore Mine which should allow the production of 16 million metric tons per year by mid-2012, up from 10 million tons now. It also said that demand in the iron ore market is tight.
In addition, Assore mines manganese and chrome as well as producing ferroalloys for the steel industry; and it expects challenging conditions for the first two.
- Macarthur Coal backs sweetened joint Peabody and ArcelorMittal bid
Peabody Energy and ArcelorMittal have increased their joint takeover bid for Macarthur Coal by 3% to A$4.9 billion ($5.2 billion) and, thus, have secured the backing of the Australian miner for the offer after rivals failed to emerge. Macarthur is the World’s largest producer of pulverised coal; it has also fought off four takeover attempts over the past three years. For the record, PCI - pulverised coal injection - is used as a replacement for coke in the production of pig iron.
Note, too, that Citic Resources, which owns 24.5 % of Macarthur, has made no comment thus far. However, the offer from P/AM only needs 50.1 % of acceptances.
- Severstal triples Q2 net profits and leaves rivals behind
Russia’s largest steelmaker has reported that Q2 net profit more than tripled from $192 to 602 million, driven by strong mining assets and recent divestments (including the Sparrows Point mill in the US). The Company, controlled by billionaire CEO Alexei Mordashov, is benefiting from a vertically integrated structure in coking coal and iron ore, where prices have soared. In fact, the mining unit generated a 47% EBITDA margin.
Magnitogorsk Iron & Steel Works (aka MMK), Russia’s third largest producer, also reported on Friday and its Q2 net profit fell from $53 to 13 million, down from $53 million last year. A day earlier, Novolipetsk Steel, Russia’s number four, reported Q2 net profit up 28% at $587 million. Unlike Severstal, however, both NLMK and MMK must purchase some of their coking coal and iron ore supplies on the open market.
Both Severstal and MMK sent out some positive signals about pricing in the steel market going forward. For example, Severstal CFO Alexei Kulichenko said that prices very likely bottomed in the current quarter. “After that (May) prices actually went down significantly, and from June, July and I would say August, were on what we believe was the bottom level”. Severstal also said that in Russia, its largest single market, “real steel demand in Q3 is expected to remain firm across all steel consuming sectors due to a recovery in fixed capital investments and seasonally increased construction activity”. MMK, meantime, said it expects “positive momentum to recover in H2 2011 with respect to both demand and steel prices”.
- IRC reports its first ever profit as iron ore sales commence from Russian facility
IRC, a Hong Kong-listed iron ore company mining in Russia, reported its first ever profit after its first sales from the Kuranakh mine; prices also rose.
Net income for the six months ended 30 June was $3.6 million, compared with a loss of $51.9 million a year earlier; while revenue increased to $60.4 million from $5.2 million.
IRC began sales from the Kuranakh project, which ships iron ore to China, in the second half of last year. IRC plans to produce 750,000 metric tons of iron ore concentrate this year, with 400,000 tons of that to be mined in the second half of the year. IRC’s average realised iron ore concentrate price rose 12% in the first six months.
- Fleming Family may invest $2 billion in Russian iron ore
It is reported that Fleming Family & Partners, a UK private equity firm, may invest $2 billion to develop iron ore deposits in the Chelyabinsk region of Russia.
Elsewhere, iron ore prices continue to ignore the World’s economic travails and, last seen were up a touch at $177.9 delivered in China (on 23 August) said Steel Index. Similarly, BHP noted that the spot price for iron ore is trading at close to $178 per tonne, which is not far off the record $191.90 touched in mid-February; and nearly triple the price in late 2008, thanks to booming Chinese demand. The Group also added that it continues to favour long term iron ore supply contracts in its trading.
But this has not done any favours for the profits of China’s listed steelmakers and when 27 of them released their H1 results on Monday, after the market had closed, their combined net profit showed a slump of 16% year-on-year to Yuan 9.98 billion ($1.56 billion), according to Wind Information. And, 16 of them reported lower profit margins. Similarly, Mysteel said “the steel industry will continue to suffer great pressure during the second half of this year”. Not that this stopped, Baosteel taking 51% of middle-sized steelmaker Shaoguan Steel in Guangdong province as part of the Country’s steel restructuring plan. Okay, it was a free transfer on this occasion.
Elsewhere, Taiwan’s China Steel will raise prices 1% in October/November, while capesize freight rates have risen 26% since 1 July as Japan rebuilds. Meantime, in India, Sesa Goa continues to be restrained by Indian Government iron ore mining restrictions, while in Canada the Quebec Government has announced an $80 billion regional development plan focused on attracting Japanese and Chinese natural resource investors to the region.
Further south, USIM, Brazil’s number two steelmaker is looking to quadruple its iron ore production, and would very much like to win the auction for a new $1 billion port terminal to be built in Rio de Janeiro State. Then, moving east, South Africa’s Assore has doubled its 2011 net profit to $440 million, principally on iron ore.
Down under in Australia, Peabody Energy and ArcelorMittal have increased their joint takeover offer for Macarthur Coal by 3% to A$4.9 billion ($5.2 billion) - and it has been accepted. Macarthur is the World’s largest producer of pulverised coal which is used as a replacement for coke in the production of pig iron. Note, however, that Citic Resources, which owns 24.5 % of Macarthur, has made no comment thus far. However, the offer from P/AM only needs 50.1 % of acceptances.
Finally a lot seems to be happening in Russia where its largest steelmaker, Severstal, has just reported that Q2 net profit had more than tripled from $192 to 602 million; it also enjoyed a 47% EBITDA margin. Steel makers in Russia, the World’s fifth largest producer, are benefiting from being low cost producers, but the vertically integrated companies are showing the greatest year-on-year improvement. For example, MMK, Russia’s third largest producer, saw its Q2 net profit fall from $53 to 13 million.
In addition, IRC, a Hong Kong-listed iron ore company mining in Russia, posted its first ever profit after commencing sales from its Kuranakh mine; prices were also higher. Net income for the six months ended 30 June was $3.6 million, compared with a loss of $51.9 million a year earlier. Revenue, meantime, increased to $60.4 million from $5.2 million a year earlier.
And last but not least, Fleming Family & Partners, a UK private equity firm, may invest $2 billion to develop iron ore deposits in the Chelyabinsk region of Russia.
“The finest steel has to go through the hottest fire”
- John N. Mitchell
DETAIL
- China’s daily steel output increases slightly (+0.26%) in the 10 days ending 20 August, says CISA
China’s daily crude steel output stood at 1.947 million tonnes in the period from 11 to 20 August, which is an increase of 0.26% from the previous 10 days, as plants plan to take advantage of an expected revival in demand in the autumn, says the China Iron and Steel Association. This is also the second consecutive ten day period in which it has done so. And, in the year to date there have been 23 ‘official’ 10 days trading periods and on 15 occasions daily production rose.
"China’s overall investment in construction projects has remained aggressive this year which is the driver behind steel production” said Smart Timing Steel. It is also the case that steel mills benefited from a robust level of construction actvity even during the summer, when it normally slows down i.e. daily steel output has remained close to the record of more than 2 million tonnes set in the last 10 days of June. Similarly, daily steel output has stayed above 1.9 million tonnes since February, up from an average of about 1.7 million tonnes last year. “The next two months are normally the last opportunity for large sales for steel mills as demand traditionally picks up and pushes prices higher” said Anshan Iron & Steel. In addition, China's major steel companies have all raised main product prices for September sales.
- China steelmakers’ profits weaken as iron ore prices rise
China’s steelmakers saw their profits sharply reduced by higher iron ore prices in the first half of 2011. For example, 27 listed Chinese steel producers released their H1 results on Monday, after hours. Their combined net profit slumped 15.7% year-on-year to Yuan 9.98 billion ($1.56 billion), according to Wind Information. And, of the 27 listed steel companies, 16 reported lower margins.
In the first half of 2011, China imported 334 million metric tons of iron ore, 8.1% more than a year ago, says the NBS. And, the average price rose by 42.4% year-on-year to $161 per metric ton.
Meantime, China’s steel output grew by 9.6% year-on-year in H1 to 350 million metric tons, but the industry’s profit margins dropped to 2.42% in the first five months, the lowest in many years, according to the Ministry of Industry and Information Technology (MIIT). It attributed this weaker profitability to rising iron ore prices.
Similarly, Mysteel said “the steel industry will continue to suffer great pressure during the second half of this year”.
This included China’s largest listed steelmaker, Baosteel, which saw net profits fall 37% to Yuan 5.08 billion ($796 million). It was particularly affected by lower demand from the auto industry. Q3 profits are also expected, by the market, to be lower.
- Baosteel acquires 51% of Shaoguan Steel
Baosteel Group will take a 51% stake in a middle-sized steelmaker Shaoguan Steel in Guangdong province as part of the Country’s steel restructuring plan. The free transfer of the stake is still subject to approval from State Assets Regulator.
Baosteel Group, the second largest manufacturer by output, agreed to set up a joint venture named Guangdong Steel Group in mid-2008. It controlled 80% with Guangzhou Steel, while Shaoguan owned 20%. Guangzhou Steel and Shaoguan Steel, both owned by the Guangdong provincial government, will also withdraw their stakes from Guangdong Steel Group.
- Taiwan’s China Steel raises October and November prices by an average 1%
Taiwan’s largest steel producer has said that it will raise domestic prices for October and November by an average 1% from September, principally due to higher commodity prices.
- Shipping rates rise as Japan rebuilds; with capesize up 26% since 1 July
Shipping rates for dry bulk vessels are being boosted by rebuilding efforts after the Japanese earthquake and tsunami increased imports of iron ore and coal since July, according to Lorentzen & Stemoco. “From our perspective, the market is better positioned for a recovery now than at any time during the last three years”.
Hire costs for capesize vessels have risen 26% since 1 July, adds the Baltic Exchange. Similarly, through 24 August, it notes that the cost to hire capesize vessels (which haul iron ore and coal) have climbed for 11 consecutive day to the highest level this year. For example, average daily capesize rents hit $19,010 last week, the most expensive since 24 December. Rents for the ships - which account for 40% of dry bulk fleet capacity - have rallied this month as higher commodity exports helped relieve a vessel glut. The surplus caused average rents to collapse to the lowest level since 2002 in Q1 and Q2 of this year.
However, trading in forward freight agreements, used to hedge the cost of shipping dry bulk commodities by sea, suggests rates may be peaking, according to RS Platou Markets. For example, October-to-December capesize contracts last week were trading at $14,500 to 14,700 per day.
That said, some spot voyage prices for capesize have soared to over $40,000 in recent days as, says Dahlman Rose, the cost of iron ore produced in China was higher than imports for the first time in the current year.
- BHP Billiton sees 2010-11 net profit rise 86% to $23.6 billion
The World’s largest mining company’s annual net profit rose 86% to $23.6 billion on the back of dramatically higher prices for iron ore and copper; market expectations were clustered around $22 billion. Revenue, meantime, for the year was up 35.9% to $71.7 billion which meant a spectacular lift in margins from 24.1 to 32.9%.
BHP said the strong performance was the result of rising prices for its key commodities which reflected high levels of demand from emerging markets such as China - and tight supply. BHP also said that it expects “robust demand” in the short and medium term, but warned that cost pressures could hurt its earnings further out.
The Company added that it expected weak growth in Europe and the US. That said, recent turbulence had not significantly dented demand overall and the Company said it continued to see a strong outlook longer term, underpinned by emerging market demand and barriers to the expansion of supply as miners are hit by funding constraints and labour and equipment shortages.
“The junior (producers) will once again not bring on the volume growth that is being fed into analyst forecasts”, said CEO Marius Kloppers. The constraints squeezing these junior suppliers are likely to prompt deals, but BHP will focus on base metals, oil and gas and potash - sectors where any deals are less likely to face regulatory hurdles. “The balance sheet has capacity for sizeable acquisitions. Opportunity has always been the limiting factor”.
Turning to costs, BHP said labour and equipment increases cut earnings by $1.2 billion in the year to June. Nor did currency help and the weakness of the US dollar against the Australian dollar, together with inflation, took a $3.2 billion bite out of full year operating profit. That said, BHP said it was “congenitally” opposed to currency hedging. “The prices rises that we have seen on the revenue side lag between six and 12 months, and we were going to see them on the cost side in due course”.
Costs excluding inflation and currency movements rose 5% in the year to June, compared with zero growth the year before. However, Kloppers declined to give a forecast for 2012, although they are expected to increase.
Nonetheless, “we remain positive on the longer term outlook for the global economy. Over the past decade, emerging economies have contributed more to global growth than the developed world and we expect their share to expand as the process of urbanisation and industrialisation continues”.
- BHP says it will stay with long term contracts for iron ore
Turning to iron ore, the World’s number three supplier said it was linking the majority of its sales to monthly average spot prices but continued to negotiate long term contracts for supply volumes. This after, it led a drive in 2010 to disband a 40 year old system of pricing iron ore once a year - in the face of opposition from customers in China. Kloppers also said that on a FOB basis, BHP’s sales were running “very close” to record high prices. Note, too, that iron ore is its largest division and income here last year soared by 122% to $13.3 billion.
- Sesa Goa says Indian iron ore mining has impacted performance
Sesa Goa, which is owned by Vedanta, has said that its performance will be affected by an order from India’s Supreme Court extending a ban on mining to two more districts of the key iron ore producing regions of Tumkur and Chitradurga in the southern Indian state of Karnataka. The two account for some 7% of India's estimated 213 million tonnes of annual iron ore output and the ban could impact exports from the World’s third largest supplier.
- Quebec seeks to attract Japan and China to invest in $80 billion regional plan
Companies from Japan and China are considering investing in an $80 billion regional development plan - “Plan Nord” - in Canada’s resource-rich Quebec province, said Premier Jean Charest; with the focus on iron ore, rare earths and lithium deposits, as well as in infrastructure. Xstrata (nickel) ArcelorMittal (iron ore) are already there and the Chinese are reported to be “very interested” in iron ore (and the CICC has an office in Toronto).
ArcelorMittal is also on record (May 20) as saying that it will spend $2.1 billion to expand its Quebec iron ore facility and Xstrata, earlier this month, said it would invest a further $510 million in its nickel mine in the Province.
Quebec has also set aside $500 million (over the next five years) to purchase equity in new mining projects; but would not seek controlling holdings.
- USIM intends to bid for new Brazilian port site as it aims to quadruple iron ore output
Usinas Siderurgicas de Minas Gerais (USIM), Brazil’s number two steelmaker is looking to quadruple its iron ore production, and would very much like to win the auction for the site of a proposed $1 billion port terminal in Rio de Janeiro state.
The State government will ask for bids later this year for a lease on the so-called Area do Meio, which covers some 245,400 square metres, from companies which plan to ship the ore, Brazil’s largest export. At this time, too, USIM does not own a dedicated iron ore port facility. And, the capacity of Area do Meio will initially be 25 million metric tons per year, with capacity to expand to 44 million. Other bidders may include CSN, the third largest Brazilian steelmaker and MMX Mineracao & Metalicos.
Brazil, the second largest exporter after Australia, will boost its output to 771.5 million metric tons in 2015 from 372 million in 2010, according to estimates from the Brazilian Mining Institute. Last year, some 84% of Brazil’s iron ore output was exported for a total of $29 billion, with China buying 45% of it.
USIM's mining unit, Mineracao Usiminas, controls four mines in the Serra Azul region of Minas Gerais; and Sumitomo bought 30% of the unit for $1.93 billion last year. USIM exported 526,000 metric tons of iron ore in 2010, less than 8% of its total production, through a terminal in Itaguai operated by CSN and next to the Area do Meio. It is also reported that USIM may team up with ArcelorMittal.
Note, too, that USIM is 27.8% (voting shares) owned by Nippon Steel; and during 2011, CSN has built up a stake of some 10% in its domestic rival.
- South Africa’s Assore doubles net profit to $440 million
The South African miner said that net profit for fiscal 2011 more than doubled to Rand 3.2 billion ($440 million) on increased demand and higher prices. Sales, meantime, rose 48% to Rand 11.2 billion which meant a first class shift in profitability from 19.8 to 28.6%.
Assore, with partners, spent Rand 2.8 billion to develop infrastructure at the Khumani Iron Ore Mine which should allow the production of 16 million metric tons per year by mid-2012, up from 10 million tons now. It also said that demand in the iron ore market is tight.
In addition, Assore mines manganese and chrome as well as producing ferroalloys for the steel industry; and it expects challenging conditions for the first two.
- Macarthur Coal backs sweetened joint Peabody and ArcelorMittal bid
Peabody Energy and ArcelorMittal have increased their joint takeover bid for Macarthur Coal by 3% to A$4.9 billion ($5.2 billion) and, thus, have secured the backing of the Australian miner for the offer after rivals failed to emerge. Macarthur is the World’s largest producer of pulverised coal; it has also fought off four takeover attempts over the past three years. For the record, PCI - pulverised coal injection - is used as a replacement for coke in the production of pig iron.
Note, too, that Citic Resources, which owns 24.5 % of Macarthur, has made no comment thus far. However, the offer from P/AM only needs 50.1 % of acceptances.
- Severstal triples Q2 net profits and leaves rivals behind
Russia’s largest steelmaker has reported that Q2 net profit more than tripled from $192 to 602 million, driven by strong mining assets and recent divestments (including the Sparrows Point mill in the US). The Company, controlled by billionaire CEO Alexei Mordashov, is benefiting from a vertically integrated structure in coking coal and iron ore, where prices have soared. In fact, the mining unit generated a 47% EBITDA margin.
Magnitogorsk Iron & Steel Works (aka MMK), Russia’s third largest producer, also reported on Friday and its Q2 net profit fell from $53 to 13 million, down from $53 million last year. A day earlier, Novolipetsk Steel, Russia’s number four, reported Q2 net profit up 28% at $587 million. Unlike Severstal, however, both NLMK and MMK must purchase some of their coking coal and iron ore supplies on the open market.
Both Severstal and MMK sent out some positive signals about pricing in the steel market going forward. For example, Severstal CFO Alexei Kulichenko said that prices very likely bottomed in the current quarter. “After that (May) prices actually went down significantly, and from June, July and I would say August, were on what we believe was the bottom level”. Severstal also said that in Russia, its largest single market, “real steel demand in Q3 is expected to remain firm across all steel consuming sectors due to a recovery in fixed capital investments and seasonally increased construction activity”. MMK, meantime, said it expects “positive momentum to recover in H2 2011 with respect to both demand and steel prices”.
- IRC reports its first ever profit as iron ore sales commence from Russian facility
IRC, a Hong Kong-listed iron ore company mining in Russia, reported its first ever profit after its first sales from the Kuranakh mine; prices also rose.
Net income for the six months ended 30 June was $3.6 million, compared with a loss of $51.9 million a year earlier; while revenue increased to $60.4 million from $5.2 million.
IRC began sales from the Kuranakh project, which ships iron ore to China, in the second half of last year. IRC plans to produce 750,000 metric tons of iron ore concentrate this year, with 400,000 tons of that to be mined in the second half of the year. IRC’s average realised iron ore concentrate price rose 12% in the first six months.
- Fleming Family may invest $2 billion in Russian iron ore
It is reported that Fleming Family & Partners, a UK private equity firm, may invest $2 billion to develop iron ore deposits in the Chelyabinsk region of Russia.
Friday 26 August 2011
“The Grand Old Duke of York……
……he had ten thousand men.
He marched them up to the top of the hill and he marched them down again.
And when they were up, they were up; and when they were down, they were down.
And when they were only half-way up, they were neither up nor down".
The above is a celebrated English children’s nursery rhyme, whose lyrics have become proverbial for futile action. It was also often performed on stage with the audience being asked to play out the verses and even call out “up” or “down”; the actor’s intent, of course, to catch people out.
So it is with the Shanghai Composite (SCI) which - in the first 20 trading days of August - has gone up on eight and tramped down 11 (including today). Make your mind up!
Okay there was a modicum of optimism today when it was announced that Shaanxi Coal Industry is to IPO in Shanghai with the aim of raising up to Yuan 17.3 billion ($2.7 billion) in what could be China’s largest IPO this year. The China Securities Regulatory Commission (CSRC) will look at it on Monday (which is also my birthday). Shaanxi would be China’s third largest listed coal miner. This meant that the SCI closed the week 3.1% to the good having been down 2.3% the one before.
It may also be that the central authorities are in an easier frame of mind and the official China Securities Journal said as much on Wednesday. And this was reflected in the money market today, too, when the seven day repurchase rate fell 42 basis points to 4.0709% (the last time I looked); whereas on Tuesday it was 5.2%.
The Yuan continues to be firm, too, and, finally, moved up a tad at the close today from 6.39 to 6.3868. There are, however, divergent views about where it goes from here (and 12 Month Yuan Forwards are at a fence-sitting 1.62% premium). My view is that the Yuan will continue to rise and that its new record of 6.3820 will be soon tested. This is especially true, given that China may need to wait until September’s CPI, to see an actual dip in the rate of inflation. Similarly, Finance Minister, Xie Xuren reiterated yesterday that stable prices remain the top priority for the Chinese Government, but that any policy moves must avoid hurting economic growth. He also said that China will step up its efforts to rein in local government debt.
‘The Disciples of the Soft Landing’ continue to multiply as well and, earlier this week, a preliminary estimate for August manufacturing output said it was moderating but not collapsing. This originated from HSBC/Markit Economics and their manufacturing index which inched up to 49.8 from a final July reading of 49.3 (the first time below 50 in a year; indicating contraction). HSBC also said that the slide in the index in July may have been a one-off “blip”. Note, too, that the official manufacturing index for July from the NBS and the China Federation of Logistics and Purchasing was 50.7.
Furthermore, HSBC believes a PMI reading of as low as 48 in China still points to annual growth of 12-13% in industrial output and a 9% expansion in GDP, even if it indicates a contraction in factory activity on the month to month basis. For the record, in July, the flash reading was 48.9, compared with the final reading of 49.3 and these preliminary indices are based on 85 to 90% of responses to a survey of executives in more than 400 companies.The final August number is due out on 1 September.
Elsewhere, a number of global banks have been tinkering with their GDP forecasts for China and the consensus of the four below for the current year is now around 9.0% (having been 9.2%). Similarly, in 2012, the number is now around 8.4% which is 0.5% adrift of previous expectations.
Bank 2011 and 2012
% New (Old) New (Old)
Citi: for 2011 only 9.0 (9.2)
UBS: 9.0 (9.3) and 8.3 (9.0)
MS: for 2012 only 8.7 (9.0)
DB: 8.9 (9.1) and 8.3 (8.6)
Notes: MS is Morgan Stanley; DB is Deutsche Bank
It is also worth noting that Citi does not expect an interest rate hike this year but does see faster Yuan appreciation. Meantime, UBS says that its forecast changes reflect weaker growth prospects in developed economies (and thus exports) and that the PBOC may relax policy if the economy falters. In fact in 2012, UBS says that export growth may be as low as 5.5% which compares with a previous forecast of 12% and net exports could deduct around one percentage point from China’s GDP growth in 2012. The Swiss bank also says that the PBOC is likely to keep interest rates on hold for now and could opt to ease policy if exports, investment, and industrial production slow sharply.
UBS has also cut its inflation outlook for China from 5.3 to 5.2% in 2011 and from 4.0 to 3.5% in 2012.
For its part, Morgan Stanley says that the evolution of China’s economic growth in 2012 is important slowing from 9.7% in Q1 to 8.1% in Q4. Similarly, Deutsche says that the chance of China’s economic expansion slowing to 7% has jumped from 5 to 15%. Finally, RBS adds (a little more positively) that if growth in the US falls to zero this year, China’s GDP growth will probably decline, on a full year basis, by only 60 basis points. “So, growth will still be between the 8.5 and 9.0% range”.
And the last word, comes from Nomura, whose technical boffins say that China’s stocks are approaching oversold levels. This after the Shanghai Composite had fallen 17.4% from this year’s 18 April peak (on 8, 9 and 22 August); it is now off 14.6% on the same basis. “China is on track for a soft landing despite the external risks, with accelerating inland growth and investment in public housing and new projects”.
“To climb steep hills requires slow pace at first” – Shakespeare
SHANGHAI COMPOSITE:
Today: -0.12% to 2,612.19 at close
This week: +3.07%
Last week: -2.27%
August: -3.3%
YTD: -7.0%
Year ago: -0.3%
HANG SENG:
Today: +0.38% to 20,289.03 at close
This week: +3.41%
Last week: -6.33%
August: -9.6%
YTD: -11.9%
Year ago: -4.0%
OIL: $84.91
GOLD: $1786.40
(immediate delivery/intra-day high of $1,917.90 on 23 August 2011)
EURO/$: 1.4426
He marched them up to the top of the hill and he marched them down again.
And when they were up, they were up; and when they were down, they were down.
And when they were only half-way up, they were neither up nor down".
The above is a celebrated English children’s nursery rhyme, whose lyrics have become proverbial for futile action. It was also often performed on stage with the audience being asked to play out the verses and even call out “up” or “down”; the actor’s intent, of course, to catch people out.
So it is with the Shanghai Composite (SCI) which - in the first 20 trading days of August - has gone up on eight and tramped down 11 (including today). Make your mind up!
Okay there was a modicum of optimism today when it was announced that Shaanxi Coal Industry is to IPO in Shanghai with the aim of raising up to Yuan 17.3 billion ($2.7 billion) in what could be China’s largest IPO this year. The China Securities Regulatory Commission (CSRC) will look at it on Monday (which is also my birthday). Shaanxi would be China’s third largest listed coal miner. This meant that the SCI closed the week 3.1% to the good having been down 2.3% the one before.
It may also be that the central authorities are in an easier frame of mind and the official China Securities Journal said as much on Wednesday. And this was reflected in the money market today, too, when the seven day repurchase rate fell 42 basis points to 4.0709% (the last time I looked); whereas on Tuesday it was 5.2%.
The Yuan continues to be firm, too, and, finally, moved up a tad at the close today from 6.39 to 6.3868. There are, however, divergent views about where it goes from here (and 12 Month Yuan Forwards are at a fence-sitting 1.62% premium). My view is that the Yuan will continue to rise and that its new record of 6.3820 will be soon tested. This is especially true, given that China may need to wait until September’s CPI, to see an actual dip in the rate of inflation. Similarly, Finance Minister, Xie Xuren reiterated yesterday that stable prices remain the top priority for the Chinese Government, but that any policy moves must avoid hurting economic growth. He also said that China will step up its efforts to rein in local government debt.
‘The Disciples of the Soft Landing’ continue to multiply as well and, earlier this week, a preliminary estimate for August manufacturing output said it was moderating but not collapsing. This originated from HSBC/Markit Economics and their manufacturing index which inched up to 49.8 from a final July reading of 49.3 (the first time below 50 in a year; indicating contraction). HSBC also said that the slide in the index in July may have been a one-off “blip”. Note, too, that the official manufacturing index for July from the NBS and the China Federation of Logistics and Purchasing was 50.7.
Furthermore, HSBC believes a PMI reading of as low as 48 in China still points to annual growth of 12-13% in industrial output and a 9% expansion in GDP, even if it indicates a contraction in factory activity on the month to month basis. For the record, in July, the flash reading was 48.9, compared with the final reading of 49.3 and these preliminary indices are based on 85 to 90% of responses to a survey of executives in more than 400 companies.The final August number is due out on 1 September.
Elsewhere, a number of global banks have been tinkering with their GDP forecasts for China and the consensus of the four below for the current year is now around 9.0% (having been 9.2%). Similarly, in 2012, the number is now around 8.4% which is 0.5% adrift of previous expectations.
Bank 2011 and 2012
% New (Old) New (Old)
Citi: for 2011 only 9.0 (9.2)
UBS: 9.0 (9.3) and 8.3 (9.0)
MS: for 2012 only 8.7 (9.0)
DB: 8.9 (9.1) and 8.3 (8.6)
Notes: MS is Morgan Stanley; DB is Deutsche Bank
It is also worth noting that Citi does not expect an interest rate hike this year but does see faster Yuan appreciation. Meantime, UBS says that its forecast changes reflect weaker growth prospects in developed economies (and thus exports) and that the PBOC may relax policy if the economy falters. In fact in 2012, UBS says that export growth may be as low as 5.5% which compares with a previous forecast of 12% and net exports could deduct around one percentage point from China’s GDP growth in 2012. The Swiss bank also says that the PBOC is likely to keep interest rates on hold for now and could opt to ease policy if exports, investment, and industrial production slow sharply.
UBS has also cut its inflation outlook for China from 5.3 to 5.2% in 2011 and from 4.0 to 3.5% in 2012.
For its part, Morgan Stanley says that the evolution of China’s economic growth in 2012 is important slowing from 9.7% in Q1 to 8.1% in Q4. Similarly, Deutsche says that the chance of China’s economic expansion slowing to 7% has jumped from 5 to 15%. Finally, RBS adds (a little more positively) that if growth in the US falls to zero this year, China’s GDP growth will probably decline, on a full year basis, by only 60 basis points. “So, growth will still be between the 8.5 and 9.0% range”.
And the last word, comes from Nomura, whose technical boffins say that China’s stocks are approaching oversold levels. This after the Shanghai Composite had fallen 17.4% from this year’s 18 April peak (on 8, 9 and 22 August); it is now off 14.6% on the same basis. “China is on track for a soft landing despite the external risks, with accelerating inland growth and investment in public housing and new projects”.
“To climb steep hills requires slow pace at first” – Shakespeare
SHANGHAI COMPOSITE:
Today: -0.12% to 2,612.19 at close
This week: +3.07%
Last week: -2.27%
August: -3.3%
YTD: -7.0%
Year ago: -0.3%
HANG SENG:
Today: +0.38% to 20,289.03 at close
This week: +3.41%
Last week: -6.33%
August: -9.6%
YTD: -11.9%
Year ago: -4.0%
OIL: $84.91
GOLD: $1786.40
(immediate delivery/intra-day high of $1,917.90 on 23 August 2011)
EURO/$: 1.4426
Monday 22 August 2011
Iron & steel weekly: “keep calm and carry on”
This was the strap line on a poster produced by the British government in 1939 at the beginning of WW2. It was intended to raise morale, but in the event was little used. It has, however, had a new lease of life in more recent years; and still means the same.
Okay, you can’t ignore the background noise of possible economic calamity and equity market routs; or gold at $1894.80 (at the time of writing). Nonetheless, given the news flow in the iron and steel sectors, there has also been a remarkable insouciance.
For example, Macquarie says that because of demand in China, iron ore supply won’t keep up with it – even with zero growth in Europe and North America. Similarly, CISA says steel demand in China is expected to remain robust; it also says that while China only owns some 10% of its imported iron ore at this time – it should be 50% in five to 10 years.
Following on from Baoshan, China’s leading steel mills are also raising prices for September, which reflect both the spot market and expected demand levels. Fortescue Metals, Australia’s number three iron ore producer, produced a 77% rise in annual profits (to $1.02 billion) and said it was confident about long term demand in China; it sells most of its product here. That said, it did admit that tighter credit conditions have slowed orders a bit.
Meantime, in South Africa, Kumba and Sishen (74% owned) are embroiled in a legal dispute over the ownership of a disputed mining licence which used to belong to ArcelorMittal but is now in the hands of ICT, which has indirect links to South Africa’s President. This is an iron ore soap opera.
Exxaro Resources (which owns 20% of Sishen) has also produced figures, this time for H1 in which it saw net profits rise 33% to $445 million. Additionally, the Company said it would like to be more involved in directly-owned iron ore production; and would even consider raising equity to do so.
The World’s largest ferrochrome producer, ENRC, was another corporate which enjoyed a good first half (net profit up 29% to $1.17 billion) and it appears to be coming to grips with its corporate governance issues. The Company is also investing in iron ore assets and this product accounted for 43% of its EBITDA in H1. ENRC is also seeking to produce 19.5 million tons of iron ore by 2014 and 45 million tons by 2016.
Finally, keeping calm are African Minerals, Renova/East One, Cliff Resources and Anglesey Mining; while Magnitogorsk/Atop and Minmetals/Sinosteel are carrying on. See below.
“You better think about the future, for it's where you will spend the rest of your life” - Anon
- Iron ore demand in China exceeds supply (still)
Demand in China, the biggest consumer of metals, will keep iron ore markets in deficit this year and next year, even in the event of zero growth in Europe and North America, says Macquarie. Earlier, Wood Mackenzie is on record (last month) as saying that iron ore prices are set to stay at “elevated” levels until at least 2015 because of short supply. However, Citigroup has (as of last week) lowered its three month iron ore forecast to $160 per metric ton.
- CISA expects steel demand to remains strong
Steel demand in China is expected to remain robust as the World’s second largest economy aims to maintain strong growth boosted by its continued investment in urbanisation and industrialisation, according to the China Iron & Steel Association (CISA). “The engine driving up China’s economic growth will still be powerful due to rapid investment growth, which will support steel demand in the near future”. CISA also expects that China’s steel exports will continue to stay relatively high, supporting steel demand. China’s economy should grow 9.2% in Q3, slightly down from the first two quarters of the year, according to the NDRC, but still not bad at all.
Inventories of five main steel products: hot rolled coil; cold rolled coil; plate; wire rod; and rebar fell for the fourth straight month by 3.24% to 13.85 million tonnes in 26 major cities by end of July from the previous month.
“Large-scale construction of social housing and water conservancy as well as railway projects will continue to boost demand for construction steel products, while flat steel product mills will face growing competition as its end users including shipbuilding, auto and machinery see slower growth”.
Data also show that rebar spot prices rose 0.85% at the end of July from a month earlier. Meantime wire rod added 1.51% to its price and hot rolled coil +0.43%; albeit most other steel products fell modestly in the month. “Chinese steel mills will still face high production costs in the near future, narrowing the room for prices to fall in a large way”.
Prices of spot iron ore gained 1.5% in July from June, while coking coal prices jumped 2% from a month earlier.
China owns 10% of its imported; and this should be 50% in five to 10 years (CISA)
China currently owns less than 10% of its imported iron ore (618 million tonnes last year); and it should seek 50% from Chinese-invested overseas sources in the next five to 10 years, according to Li Xinchuang, Deputy Secretary-General of China Iron Steel Association (CISA). These comments were reported in the China Daily last month wherein Li said China would be able to break the hold of Rio, Vale and BHP on supply and pricing only if it can source half its overseas ore from Chinese-invested mines.
- More China steel mills raise September prices on demand
More of China’s leading steel mills have announced price rises for their main products for September in order to both catch up on the spot market and in anticipation of stronger demand next month. Fort example, Wuhan Iron & Steel and Beijing Shougang, will raise September prices for their main flat steel products in the wake of a similar move by Baosteel the week before; the latter is pretty much the domestic price leader.
“Price rises by steel mills reflect climbing prices in the spot market since the end of July as steel mills received strong bookings in August. Steel prices are expected to increase next month as traders and end users need to build up stocks as demand improves” said Timing Steel.
Wuhan Steel, the number three producer, plans to increase hot rolled coil prices by Yuan 100 per tonne and cold rolled by Yuan 120 per tonne; which is in line with Baosteel. Similarly, Shougang will lift cold rolled coil prices by Yuan 50 per tonne, but has yet to make a decision on hot rolled. Angang Steel is expected next.
- Fortescue CEO says tight credit conditions are slowing orders for iron ore in China; but the long term picture remains rosy
Fortescue Metals Group, Australia’s third largest producer of iron ore, said tighter credit conditions in China have slowed orders from steel mills; and this as it reported full year net profit up 76% to $1.02 billion. “While we’ve not had any impact on a month-to-month basis, we have seen perhaps a cooling off as you look forward in the market” said CEO Nev Power.
Nonetheless, the Company, which sells almost all of its ore to China, also expects iron ore markets to stay strong. “Looking at the next five years, the Chinese 12th Five Year Plan is still very intensive in steel consumption and demand” added David Liu, Fortescue’s Head of China Sales and Marketing. “So we still see underlying requirement for steel to remain very, very strong”.
Fortescue’s average price for iron ore in the fiscal year to 30 June rose 68% to $149 per ton.
- Kumba denies it has committed fraud over South Africa mining license application
Sishen Iron Ore Company, a 74% owned unit of Kumba Iron Ore, has denied committing fraud in its application for a disputed mining license which was awarded to a rival, Imperial Crown Trading (ICT).
“The submission that Sishen Iron Ore has admitted to fraud is quite frankly absurd” Chris Loxton, Kumba’s lawyer, told the North Gauteng High Court in Pretoria last week. However, Willie Vermeulen, the Department of Mineral Resources’ Senior Counsel has said that Sishen arranged with an official to date its rights application 1 May 2009, a day after it submitted the proposal. The date is significant as the 21.4% share that had been held by ArcelorMittal South Africa expired on 30 April. The Ministry said it will seek criminal charges against Sishen.
Nonetheless, both Kumba and ArcelorMittal are separately asking the High Court to overturn the award of prospecting rights for the Sishen mine to ICT, whose owners include Jagdish Parekh, a business partner of Duduzane Zuma, son of the RSA President.
ICT’s receipt of the rights was based on “incomplete, manipulated and fraudulent title deeds” according to Loxton. Plus, Kumba says it’s the only party eligible for the rights to the Nation’s largest iron ore mine.
ArcelorMittal lost its rights after failing to renew the title. In turn, prompting Kumba cancelled an agreement to supply 6.25 million metric tons of iron ore at cost plus 3% to ArcelorMittal when it learned the prospecting right was awarded to Imperial.
Kumba is 63% owned by Anglo American and Sishen Iron Ore is 74% owned by Kumba, 20% by Exxaro Resources with the balance (6%) with the locals.
- Exxaro Resources profit climbs 33% on coal and iron ore
Exxaro Resources, the second largest coal producer in South Africa, said H1 net profit rose 33% to Rand 3.2 billion ($445 million) as increased demand for the fuel drove up prices and its share in an iron ore venture boosted earnings. Sales, meantime, rose 22% to Rand 9.6 billion which meant profitability at 33.3% versus 30.5%.
Coal producers in South Africa have seen profits buoyed by higher prices as sales to steelmakers and power plants recover. An improved performance at its mineral sands businesses together with an increased contribution from a 20% stake in Kumba’s Sishen mine boosted earnings with a Rand 2.4 billion contribution ($334 million).
While Exxaro does not produce iron ore itself, it is “constantly evaluating” projects in West Africa and Australia and would consider raising equity funding to buy the right assets.
- African Minerals seeks tighter takeover protection
The largest company on AIM will ask shareholders next month to vote on increasing its takeover protection due to the belief that its corporate profile will rise once it starts producing iron ore. The provisions will be a diluted version of the UK’s Takeover Code; note that African Minerals is Bermuda-registered and, thus, not covered by the Code. Similarly, African Minerals last month appointed Deutsche Bank as its nominated adviser and broker.
The Company expects to start producing iron ore at its flagship Tonkolili project in Sierra Leone this year. Shandong Iron & Steel, the World’s ninth-largest steel group, has agreed to pay $1.5 billion for a 25% stake in the project and African Minerals’ shares have risen 13% so far this year (to 474.25 pence), valuing it at £1.6 billion.
African Minerals’ Chairman is the colourful Frank Timis, a self-made Russian billionaire, who owns 12.4%; with Timis Diamond Corporation holding 12.6%. He is committed to remaining a Director of African Minerals until Phase III development of the project has been completed. Tonkolili is expected to produce 12 million tonnes of iron ore a year at full capacity, rising by 23 million tonnes and by 45 million a year following planned Phase II and III expansions.
- ENRC H1 net profit rises 29% on higher commodity prices
Kazakhstan-based and London-listed Eurasian Natural Resources Corporation, the World’s largest ferrochrome producer, reported H1 profit up 29% at $1.17 billion on sales ahead 32% to $4.01 billion. However, this meant a cost-driven dip in margins from 29.8 to 29.2%. The H1 dividend of 16 cents a share was increased by 28%.
Producers of ferroalloys have seen profits buoyed by rising demand from Asia’s auto, electrical appliance and building sectors. Benchmark European prices for ferrochrome averaged $1.30 per pound in the first half, 9.7% higher than a year earlier, according to Merafe Resources, which part-owns ENRC along with Xstrata.
“We expect the progress in the Group’s financial performance to continue through the second half, although at a slower rate than in the first” said ENRC’s acting CFO Felix Vulis. “Overall group unit costs are expected to rise at around 20% in 2011 in addition to some limited volume growth”. Q2 output of ferroalloys rose 0.8% to 398,000 metric tons and ferrochrome production gained 3.2%.
The Company plans to complete a three month governance review to restructure the board by the middle of September and is committed to remaining a UK-listed company. Shareholders voted on 8 June against rehiring independent directors Richard Sykes and Kenneth Olisa in a corporate governance dispute.
Vulis, who resigned on 4 February and remains in the post while the Company seeks a replacement, would not say whether he would stay on as CEO after the process.
ENRC is investing in iron ore assets to diversify output and extend its geographic reach as Chinese demand for the steelmaking material drives up prices. The Company, which is spending $11 billion to boost output across all its divisions, is seeking to produce 19.5 million tons of iron ore by 2014 and 45 million tons by 2016. The iron ore unit accounted for 43% of the Company’s $1.93 billion EBITDA in the first half of the year and it produced 8 million tonnes of saleable production.
- Magnitogorsk is sued by partner in iron ore unit
It is reported that Magnitogorsk Iron & Steel has been sued by its partner in an iron ore venture after assuming ownership of a license to the venture’s largest ore deposit, according to Interfax. Atop International Group, which holds 49% of the OAO Bakalskoye Rudoupravleniye venture, filed a suit in Chelyabinsk, after the license to the Techenskoye ore field was transferred to Magnitogorsk in May following regulatory approval. A spokesman for Magnitogorsk said he sees no legitimate grounds for the suit.
- Renova in talks to buy Ukrainian metals assets
Russian billionaire Viktor Vekselberg’s Renova Group is in talks to buy metals assets of Viktor Pinchuk’s EastOne LLC, it is reported by Kommersant. EastOne is looking to sell 25% of companies which control three ferroalloy plants and two iron ore processing facilities in Ukraine, including Nikopolsky Zavod Ferosplavov (NFER), one of the World’s biggest iron ore plants. The stakes may be worth a total of as much as $1.5 billion, added Kommersant.
- China Minmetals and Sinosteel face a renewed magnesite price fixing case in the US
China Minmetals Corporation, China’s largest State-owned metals trader, and Sinosteel must face claims they conspired to fix the price of magnesite sold in the US, according to a Federal Appeals Court ruling. The US Court of Appeals in Philadelphia reversed a lower court decision dismissing the lawsuit. The lower court erred in ruling that it lacked jurisdiction to decide the dispute based on a federal statute, the appeals panel said, remanding the case for further proceedings.
- Cliffs Natural Resources in four million share buyback
The largest producer of iron ore pellets in North America has announced that it has approved the repurchase of up to four million of its shares. “Given the recent volatility in the global equity markets, today’s adoption of a repurchase authorisation will allow Cliffs to opportunistically acquire shares at attractive valuations” said Cliffs Natural Resources CFO Laurie Brlas. She also added that the share repurchase programme expires at the end of the year.
- Anglesey Mining’s Labrador Iron signs iron ore deal
Labrador Iron Mines (33% owned by Anglesey Mining PLC) will sell and ship its iron ore production for 2011 to the Iron Ore Company of Canada. Thereafter, it will be delivered to Asia and sold at spot prices based on actual realised prices to Chinese customers. The Company will move the ore from the James mine in north west Labrador by rail to the Port of Sept-Iles in Quebec.
Okay, you can’t ignore the background noise of possible economic calamity and equity market routs; or gold at $1894.80 (at the time of writing). Nonetheless, given the news flow in the iron and steel sectors, there has also been a remarkable insouciance.
For example, Macquarie says that because of demand in China, iron ore supply won’t keep up with it – even with zero growth in Europe and North America. Similarly, CISA says steel demand in China is expected to remain robust; it also says that while China only owns some 10% of its imported iron ore at this time – it should be 50% in five to 10 years.
Following on from Baoshan, China’s leading steel mills are also raising prices for September, which reflect both the spot market and expected demand levels. Fortescue Metals, Australia’s number three iron ore producer, produced a 77% rise in annual profits (to $1.02 billion) and said it was confident about long term demand in China; it sells most of its product here. That said, it did admit that tighter credit conditions have slowed orders a bit.
Meantime, in South Africa, Kumba and Sishen (74% owned) are embroiled in a legal dispute over the ownership of a disputed mining licence which used to belong to ArcelorMittal but is now in the hands of ICT, which has indirect links to South Africa’s President. This is an iron ore soap opera.
Exxaro Resources (which owns 20% of Sishen) has also produced figures, this time for H1 in which it saw net profits rise 33% to $445 million. Additionally, the Company said it would like to be more involved in directly-owned iron ore production; and would even consider raising equity to do so.
The World’s largest ferrochrome producer, ENRC, was another corporate which enjoyed a good first half (net profit up 29% to $1.17 billion) and it appears to be coming to grips with its corporate governance issues. The Company is also investing in iron ore assets and this product accounted for 43% of its EBITDA in H1. ENRC is also seeking to produce 19.5 million tons of iron ore by 2014 and 45 million tons by 2016.
Finally, keeping calm are African Minerals, Renova/East One, Cliff Resources and Anglesey Mining; while Magnitogorsk/Atop and Minmetals/Sinosteel are carrying on. See below.
“You better think about the future, for it's where you will spend the rest of your life” - Anon
- Iron ore demand in China exceeds supply (still)
Demand in China, the biggest consumer of metals, will keep iron ore markets in deficit this year and next year, even in the event of zero growth in Europe and North America, says Macquarie. Earlier, Wood Mackenzie is on record (last month) as saying that iron ore prices are set to stay at “elevated” levels until at least 2015 because of short supply. However, Citigroup has (as of last week) lowered its three month iron ore forecast to $160 per metric ton.
- CISA expects steel demand to remains strong
Steel demand in China is expected to remain robust as the World’s second largest economy aims to maintain strong growth boosted by its continued investment in urbanisation and industrialisation, according to the China Iron & Steel Association (CISA). “The engine driving up China’s economic growth will still be powerful due to rapid investment growth, which will support steel demand in the near future”. CISA also expects that China’s steel exports will continue to stay relatively high, supporting steel demand. China’s economy should grow 9.2% in Q3, slightly down from the first two quarters of the year, according to the NDRC, but still not bad at all.
Inventories of five main steel products: hot rolled coil; cold rolled coil; plate; wire rod; and rebar fell for the fourth straight month by 3.24% to 13.85 million tonnes in 26 major cities by end of July from the previous month.
“Large-scale construction of social housing and water conservancy as well as railway projects will continue to boost demand for construction steel products, while flat steel product mills will face growing competition as its end users including shipbuilding, auto and machinery see slower growth”.
Data also show that rebar spot prices rose 0.85% at the end of July from a month earlier. Meantime wire rod added 1.51% to its price and hot rolled coil +0.43%; albeit most other steel products fell modestly in the month. “Chinese steel mills will still face high production costs in the near future, narrowing the room for prices to fall in a large way”.
Prices of spot iron ore gained 1.5% in July from June, while coking coal prices jumped 2% from a month earlier.
China owns 10% of its imported; and this should be 50% in five to 10 years (CISA)
China currently owns less than 10% of its imported iron ore (618 million tonnes last year); and it should seek 50% from Chinese-invested overseas sources in the next five to 10 years, according to Li Xinchuang, Deputy Secretary-General of China Iron Steel Association (CISA). These comments were reported in the China Daily last month wherein Li said China would be able to break the hold of Rio, Vale and BHP on supply and pricing only if it can source half its overseas ore from Chinese-invested mines.
- More China steel mills raise September prices on demand
More of China’s leading steel mills have announced price rises for their main products for September in order to both catch up on the spot market and in anticipation of stronger demand next month. Fort example, Wuhan Iron & Steel and Beijing Shougang, will raise September prices for their main flat steel products in the wake of a similar move by Baosteel the week before; the latter is pretty much the domestic price leader.
“Price rises by steel mills reflect climbing prices in the spot market since the end of July as steel mills received strong bookings in August. Steel prices are expected to increase next month as traders and end users need to build up stocks as demand improves” said Timing Steel.
Wuhan Steel, the number three producer, plans to increase hot rolled coil prices by Yuan 100 per tonne and cold rolled by Yuan 120 per tonne; which is in line with Baosteel. Similarly, Shougang will lift cold rolled coil prices by Yuan 50 per tonne, but has yet to make a decision on hot rolled. Angang Steel is expected next.
- Fortescue CEO says tight credit conditions are slowing orders for iron ore in China; but the long term picture remains rosy
Fortescue Metals Group, Australia’s third largest producer of iron ore, said tighter credit conditions in China have slowed orders from steel mills; and this as it reported full year net profit up 76% to $1.02 billion. “While we’ve not had any impact on a month-to-month basis, we have seen perhaps a cooling off as you look forward in the market” said CEO Nev Power.
Nonetheless, the Company, which sells almost all of its ore to China, also expects iron ore markets to stay strong. “Looking at the next five years, the Chinese 12th Five Year Plan is still very intensive in steel consumption and demand” added David Liu, Fortescue’s Head of China Sales and Marketing. “So we still see underlying requirement for steel to remain very, very strong”.
Fortescue’s average price for iron ore in the fiscal year to 30 June rose 68% to $149 per ton.
- Kumba denies it has committed fraud over South Africa mining license application
Sishen Iron Ore Company, a 74% owned unit of Kumba Iron Ore, has denied committing fraud in its application for a disputed mining license which was awarded to a rival, Imperial Crown Trading (ICT).
“The submission that Sishen Iron Ore has admitted to fraud is quite frankly absurd” Chris Loxton, Kumba’s lawyer, told the North Gauteng High Court in Pretoria last week. However, Willie Vermeulen, the Department of Mineral Resources’ Senior Counsel has said that Sishen arranged with an official to date its rights application 1 May 2009, a day after it submitted the proposal. The date is significant as the 21.4% share that had been held by ArcelorMittal South Africa expired on 30 April. The Ministry said it will seek criminal charges against Sishen.
Nonetheless, both Kumba and ArcelorMittal are separately asking the High Court to overturn the award of prospecting rights for the Sishen mine to ICT, whose owners include Jagdish Parekh, a business partner of Duduzane Zuma, son of the RSA President.
ICT’s receipt of the rights was based on “incomplete, manipulated and fraudulent title deeds” according to Loxton. Plus, Kumba says it’s the only party eligible for the rights to the Nation’s largest iron ore mine.
ArcelorMittal lost its rights after failing to renew the title. In turn, prompting Kumba cancelled an agreement to supply 6.25 million metric tons of iron ore at cost plus 3% to ArcelorMittal when it learned the prospecting right was awarded to Imperial.
Kumba is 63% owned by Anglo American and Sishen Iron Ore is 74% owned by Kumba, 20% by Exxaro Resources with the balance (6%) with the locals.
- Exxaro Resources profit climbs 33% on coal and iron ore
Exxaro Resources, the second largest coal producer in South Africa, said H1 net profit rose 33% to Rand 3.2 billion ($445 million) as increased demand for the fuel drove up prices and its share in an iron ore venture boosted earnings. Sales, meantime, rose 22% to Rand 9.6 billion which meant profitability at 33.3% versus 30.5%.
Coal producers in South Africa have seen profits buoyed by higher prices as sales to steelmakers and power plants recover. An improved performance at its mineral sands businesses together with an increased contribution from a 20% stake in Kumba’s Sishen mine boosted earnings with a Rand 2.4 billion contribution ($334 million).
While Exxaro does not produce iron ore itself, it is “constantly evaluating” projects in West Africa and Australia and would consider raising equity funding to buy the right assets.
- African Minerals seeks tighter takeover protection
The largest company on AIM will ask shareholders next month to vote on increasing its takeover protection due to the belief that its corporate profile will rise once it starts producing iron ore. The provisions will be a diluted version of the UK’s Takeover Code; note that African Minerals is Bermuda-registered and, thus, not covered by the Code. Similarly, African Minerals last month appointed Deutsche Bank as its nominated adviser and broker.
The Company expects to start producing iron ore at its flagship Tonkolili project in Sierra Leone this year. Shandong Iron & Steel, the World’s ninth-largest steel group, has agreed to pay $1.5 billion for a 25% stake in the project and African Minerals’ shares have risen 13% so far this year (to 474.25 pence), valuing it at £1.6 billion.
African Minerals’ Chairman is the colourful Frank Timis, a self-made Russian billionaire, who owns 12.4%; with Timis Diamond Corporation holding 12.6%. He is committed to remaining a Director of African Minerals until Phase III development of the project has been completed. Tonkolili is expected to produce 12 million tonnes of iron ore a year at full capacity, rising by 23 million tonnes and by 45 million a year following planned Phase II and III expansions.
- ENRC H1 net profit rises 29% on higher commodity prices
Kazakhstan-based and London-listed Eurasian Natural Resources Corporation, the World’s largest ferrochrome producer, reported H1 profit up 29% at $1.17 billion on sales ahead 32% to $4.01 billion. However, this meant a cost-driven dip in margins from 29.8 to 29.2%. The H1 dividend of 16 cents a share was increased by 28%.
Producers of ferroalloys have seen profits buoyed by rising demand from Asia’s auto, electrical appliance and building sectors. Benchmark European prices for ferrochrome averaged $1.30 per pound in the first half, 9.7% higher than a year earlier, according to Merafe Resources, which part-owns ENRC along with Xstrata.
“We expect the progress in the Group’s financial performance to continue through the second half, although at a slower rate than in the first” said ENRC’s acting CFO Felix Vulis. “Overall group unit costs are expected to rise at around 20% in 2011 in addition to some limited volume growth”. Q2 output of ferroalloys rose 0.8% to 398,000 metric tons and ferrochrome production gained 3.2%.
The Company plans to complete a three month governance review to restructure the board by the middle of September and is committed to remaining a UK-listed company. Shareholders voted on 8 June against rehiring independent directors Richard Sykes and Kenneth Olisa in a corporate governance dispute.
Vulis, who resigned on 4 February and remains in the post while the Company seeks a replacement, would not say whether he would stay on as CEO after the process.
ENRC is investing in iron ore assets to diversify output and extend its geographic reach as Chinese demand for the steelmaking material drives up prices. The Company, which is spending $11 billion to boost output across all its divisions, is seeking to produce 19.5 million tons of iron ore by 2014 and 45 million tons by 2016. The iron ore unit accounted for 43% of the Company’s $1.93 billion EBITDA in the first half of the year and it produced 8 million tonnes of saleable production.
- Magnitogorsk is sued by partner in iron ore unit
It is reported that Magnitogorsk Iron & Steel has been sued by its partner in an iron ore venture after assuming ownership of a license to the venture’s largest ore deposit, according to Interfax. Atop International Group, which holds 49% of the OAO Bakalskoye Rudoupravleniye venture, filed a suit in Chelyabinsk, after the license to the Techenskoye ore field was transferred to Magnitogorsk in May following regulatory approval. A spokesman for Magnitogorsk said he sees no legitimate grounds for the suit.
- Renova in talks to buy Ukrainian metals assets
Russian billionaire Viktor Vekselberg’s Renova Group is in talks to buy metals assets of Viktor Pinchuk’s EastOne LLC, it is reported by Kommersant. EastOne is looking to sell 25% of companies which control three ferroalloy plants and two iron ore processing facilities in Ukraine, including Nikopolsky Zavod Ferosplavov (NFER), one of the World’s biggest iron ore plants. The stakes may be worth a total of as much as $1.5 billion, added Kommersant.
- China Minmetals and Sinosteel face a renewed magnesite price fixing case in the US
China Minmetals Corporation, China’s largest State-owned metals trader, and Sinosteel must face claims they conspired to fix the price of magnesite sold in the US, according to a Federal Appeals Court ruling. The US Court of Appeals in Philadelphia reversed a lower court decision dismissing the lawsuit. The lower court erred in ruling that it lacked jurisdiction to decide the dispute based on a federal statute, the appeals panel said, remanding the case for further proceedings.
- Cliffs Natural Resources in four million share buyback
The largest producer of iron ore pellets in North America has announced that it has approved the repurchase of up to four million of its shares. “Given the recent volatility in the global equity markets, today’s adoption of a repurchase authorisation will allow Cliffs to opportunistically acquire shares at attractive valuations” said Cliffs Natural Resources CFO Laurie Brlas. She also added that the share repurchase programme expires at the end of the year.
- Anglesey Mining’s Labrador Iron signs iron ore deal
Labrador Iron Mines (33% owned by Anglesey Mining PLC) will sell and ship its iron ore production for 2011 to the Iron Ore Company of Canada. Thereafter, it will be delivered to Asia and sold at spot prices based on actual realised prices to Chinese customers. The Company will move the ore from the James mine in north west Labrador by rail to the Port of Sept-Iles in Quebec.
Real estate special (August No.3): the house medicine is working
…...but the Chinese authorities are increasing the dose. That is in July, house prices rose 4.3% on a year ago, but only 0.1% on June; and, while focused on the month-by-month comparison, 14 cities from a total of 70 large and middle sized conurbations dipped by between 0.1 and 0.3% In July, while 15 were flat. What’s more it is reported today that the Housing Ministry will, by the end of this week, announce a new list of at least 30 second and third tier cities which must implement home purchase restrictions too.
But it is a slow down not a stop and must be viewed in the context of a Chinese property market in which investment, overall, was up 34% at Yuan 3.2 trillion in the first seven months of the year with sales running 26% to the good (these were also better than the H1 scores where the comparative percentage growth was 33% and 24% respectively). See also the individual company performances below
- Detail
On Thursday, the NBS published the official residential price league table for 70 cities in July (albeit we had already had a sneak preview from Soufun in the first week of August). This showed that new house prices were 4.3% higher year on year but only 0.1% ahead July on June (Soufun said 6.8 and 0.2%). Within these tallies only one city was down year on year (Sanya) with one flat (Hangzhou); albeit month on month, 15 were flat (including Beijing, Shanghai, Xiamen and Guangzhou), while 14 dipped by between 0.1 and 0.3% (including Chongqing, Hangzhou, Nanjing and Ningbo).
More revealing, perhaps, is the seven month evolution which definitely shows that the Government medicine to cure house price inflation is working; albeit there were divergent views in the media. And, okay in some peripheral cities there may have been have been some advance purchases made ahead of an inevitable extension of restrictions. For example, the July winner was Urumqi with an 8.9% year on year gain, supported by Lanzhou, Shijiazhuang and Dandong all up by between 7.7 and 8.6% on the same basis.
NEW HOUSE PRICES IN JULY (% change)
In month and On year
January 0.8 and 5.9
February 0.4 and 5.7
March 0.3 and 5.2
April 0.3 and 4.3
May 0.2 and 4.1
June 0.1 and 4.2
July 0.1 and 4.3
China’s housing transactions in July also fell - by a massive 30% - from June to Yuan 348.7 billion, said the NBS on 9 August. But this may have been a one-off trend; and we will need a longer time series here.
In terms of opinion, Mizuho Securities said “the data is encouraging as we see prices in big cities such as Beijing and Shanghai have stopped rising. The Government is determined to cool down the prices in the short term”.
“This is the beginning of a downward trend in property prices in China, with more second and third tier cities introducing purchase restriction policies” added Daiwa. “Price declines will occur in more and more cities in the coming months”.
“One thing for sure is that the Government has a strong determination to control the property market” said Yu Liang, President of China Vanke (on 9 August).
It is also reported that the Housing Ministry is, by the end of this week, likely to announce a list of at least 30 second and third tier cities which must implement home purchase restrictions.
The property sub-index with the Shanghai Composite (SCI) has fallen 3.5% in August (through 19/08) and 12.1% in the year to date; which compares with the SCI at -6.2% and -9.7% respectively.
- Agile does as it is
In other news, Agile Property said its H1 sales rose 65.5% year-on-year to Yuan 11.72 billion (1.42 million square metres) and that it sees no need to lower property prices despite tightened housing curbs. Note, however that the Company generated 39% of sales at its Clear Water Bay project in Sanya in Hainan Province; and that normalised net profit for the period almost doubled to Yuan 2.6 billion, which meant adjusted profitability rose from 18.4 to 22.0%.
"Around 25% of our current property projects are located in cities with home buying restrictions, and despite wide market speculation that Beijing would extend the restrictions to more places, we don’t see the need to cut prices at this point” said Chairman Chen Zhuo Lin. He also cited those cities which, for Agile, had “restricted” projects including Guangzhou, Foshan, Chongqing and Nanjing. However, Chen added that Guangzhou contributed Yuan 3.6 billion (31%) to the developer’s total H1 sales, meaning actual demand remains strong. In total, Agile has 70 projects in 26 cities.
Chen did admit the housing curbs have had a big impact on the real estate market, but he also said that Agile Property had been able to dodge some of the impact by slowing down land purchases. For example, it spent some Yuan 1.5 billion on land plots in H1, compared with Yuan 10 billion in the same period last year. The Chairman also said that they would put forward more projects in H2 and plans to acquire land plots in Yunnan, Xi’an and Guangzhou. In addition, Yunnan would be another key market for Agile, where it expects to build a project similar to Clear Water Bay.
- Gemdale, Shui On and Keppel
In contrast, Gemdale said it H1 net income fell 61% from a year ago to Yuan 478.3 million as sales revenue dropped 41% to Yuan 5.16 billion (and with it margins from 14.0 to 9.3%). However, timing issues were the problem and the majority of its projects are scheduled to be completed in Q4. Indeed, as of the end of June, the Company had ‘transaction area’ of 2.42 million square metres on the go which represents Yuan 30 billion in transaction value – none of which was recognised in H1.Gemdale also said that, with a weather eye on Government policy, it will expand investment in the second and third tier cities this year.
Similarly, Shui On Land, the Shanghai-based developer controlled by Hong Kong billionaire Vincent Lo, said first half profit fell 50% after it completed fewer properties. Net income in the six months to 30 June dropped to Yuan 784 million ($123 million) on revenue which slumped from Yuan 3.12 billion to Yuan 1.79 billion. This led to net margins declining from 50.0% to a still remarkable 43.8%. Going forward, the Company’s focus is high quality real estate residential and commercial projects - which target a growing middle class – and it plans to spend Yuan 8 billion ($1.3 billion) to develop Hongqiao Tiandi, an office and restaurant precinct in Shanghai. Shui On is also planning to hive off its property leasing business in China by way of a Hong Kong IPO.
Finally, Singapore’s Keppel Land has secured a 21.5 hectare lakefront residential site in China for Yuan 1.937 billion ($303 million). It is located in Wuxi in Jiangsu Province and will be the fourth project for Keppel in the City.
“A dose of adversity is often as needful as a dose of medicine” – Anon.
But it is a slow down not a stop and must be viewed in the context of a Chinese property market in which investment, overall, was up 34% at Yuan 3.2 trillion in the first seven months of the year with sales running 26% to the good (these were also better than the H1 scores where the comparative percentage growth was 33% and 24% respectively). See also the individual company performances below
- Detail
On Thursday, the NBS published the official residential price league table for 70 cities in July (albeit we had already had a sneak preview from Soufun in the first week of August). This showed that new house prices were 4.3% higher year on year but only 0.1% ahead July on June (Soufun said 6.8 and 0.2%). Within these tallies only one city was down year on year (Sanya) with one flat (Hangzhou); albeit month on month, 15 were flat (including Beijing, Shanghai, Xiamen and Guangzhou), while 14 dipped by between 0.1 and 0.3% (including Chongqing, Hangzhou, Nanjing and Ningbo).
More revealing, perhaps, is the seven month evolution which definitely shows that the Government medicine to cure house price inflation is working; albeit there were divergent views in the media. And, okay in some peripheral cities there may have been have been some advance purchases made ahead of an inevitable extension of restrictions. For example, the July winner was Urumqi with an 8.9% year on year gain, supported by Lanzhou, Shijiazhuang and Dandong all up by between 7.7 and 8.6% on the same basis.
NEW HOUSE PRICES IN JULY (% change)
In month and On year
January 0.8 and 5.9
February 0.4 and 5.7
March 0.3 and 5.2
April 0.3 and 4.3
May 0.2 and 4.1
June 0.1 and 4.2
July 0.1 and 4.3
China’s housing transactions in July also fell - by a massive 30% - from June to Yuan 348.7 billion, said the NBS on 9 August. But this may have been a one-off trend; and we will need a longer time series here.
In terms of opinion, Mizuho Securities said “the data is encouraging as we see prices in big cities such as Beijing and Shanghai have stopped rising. The Government is determined to cool down the prices in the short term”.
“This is the beginning of a downward trend in property prices in China, with more second and third tier cities introducing purchase restriction policies” added Daiwa. “Price declines will occur in more and more cities in the coming months”.
“One thing for sure is that the Government has a strong determination to control the property market” said Yu Liang, President of China Vanke (on 9 August).
It is also reported that the Housing Ministry is, by the end of this week, likely to announce a list of at least 30 second and third tier cities which must implement home purchase restrictions.
The property sub-index with the Shanghai Composite (SCI) has fallen 3.5% in August (through 19/08) and 12.1% in the year to date; which compares with the SCI at -6.2% and -9.7% respectively.
- Agile does as it is
In other news, Agile Property said its H1 sales rose 65.5% year-on-year to Yuan 11.72 billion (1.42 million square metres) and that it sees no need to lower property prices despite tightened housing curbs. Note, however that the Company generated 39% of sales at its Clear Water Bay project in Sanya in Hainan Province; and that normalised net profit for the period almost doubled to Yuan 2.6 billion, which meant adjusted profitability rose from 18.4 to 22.0%.
"Around 25% of our current property projects are located in cities with home buying restrictions, and despite wide market speculation that Beijing would extend the restrictions to more places, we don’t see the need to cut prices at this point” said Chairman Chen Zhuo Lin. He also cited those cities which, for Agile, had “restricted” projects including Guangzhou, Foshan, Chongqing and Nanjing. However, Chen added that Guangzhou contributed Yuan 3.6 billion (31%) to the developer’s total H1 sales, meaning actual demand remains strong. In total, Agile has 70 projects in 26 cities.
Chen did admit the housing curbs have had a big impact on the real estate market, but he also said that Agile Property had been able to dodge some of the impact by slowing down land purchases. For example, it spent some Yuan 1.5 billion on land plots in H1, compared with Yuan 10 billion in the same period last year. The Chairman also said that they would put forward more projects in H2 and plans to acquire land plots in Yunnan, Xi’an and Guangzhou. In addition, Yunnan would be another key market for Agile, where it expects to build a project similar to Clear Water Bay.
- Gemdale, Shui On and Keppel
In contrast, Gemdale said it H1 net income fell 61% from a year ago to Yuan 478.3 million as sales revenue dropped 41% to Yuan 5.16 billion (and with it margins from 14.0 to 9.3%). However, timing issues were the problem and the majority of its projects are scheduled to be completed in Q4. Indeed, as of the end of June, the Company had ‘transaction area’ of 2.42 million square metres on the go which represents Yuan 30 billion in transaction value – none of which was recognised in H1.Gemdale also said that, with a weather eye on Government policy, it will expand investment in the second and third tier cities this year.
Similarly, Shui On Land, the Shanghai-based developer controlled by Hong Kong billionaire Vincent Lo, said first half profit fell 50% after it completed fewer properties. Net income in the six months to 30 June dropped to Yuan 784 million ($123 million) on revenue which slumped from Yuan 3.12 billion to Yuan 1.79 billion. This led to net margins declining from 50.0% to a still remarkable 43.8%. Going forward, the Company’s focus is high quality real estate residential and commercial projects - which target a growing middle class – and it plans to spend Yuan 8 billion ($1.3 billion) to develop Hongqiao Tiandi, an office and restaurant precinct in Shanghai. Shui On is also planning to hive off its property leasing business in China by way of a Hong Kong IPO.
Finally, Singapore’s Keppel Land has secured a 21.5 hectare lakefront residential site in China for Yuan 1.937 billion ($303 million). It is located in Wuxi in Jiangsu Province and will be the fourth project for Keppel in the City.
“A dose of adversity is often as needful as a dose of medicine” – Anon.
Wednesday 17 August 2011
6.3820
The eagle-eyed amongst you will know that this number is the new all-time spot trading peak for the Yuan against the US dollar during what has been described as a Government-led “mini-revaluation”. In the same vein, the official China Securities Journal this week jumped on the band wagon with a front-page editorial saying that the time “is ripe” for China to widen the Yuan’s trading band, versus the dollar, which will pave the way for a more flexible exchange rate.
Okay, the new Yuan rate was recorded on Tuesday just before the close of business in China – and today it has eased a little to 6.3873 (the last time I looked). However, probable heir apparent to the PRC Premiership, Li Keqiang (56) is in Hong Kong today throwing Yuan around like a man with no hands. Ostensibly he is fronting the China Ministry of Finance’s Yuan 20 billion ($3.1 billion) ‘dim sum’ international bond offer (the largest ever) which will be launched tomorrow. However, he also said that foreign investors will now be allowed to buy mainland securities up to an initial quota, also, of Yuan 20 billion; although no timetable for this ‘mini-QFII’ has been set. Plus he pledged support for Hong Kong’s financial sector; and he’s only been in town one day.
The clever cash now says that the Yuan is in the front line in the battle against domestic inflation (+6.5% in July including food at +14.8%), while interest rates and RRRs are on leave. Note, too, that the seven day repurchase or repo rate is, today, at 3.23% (again, the last time I looked); at the end of July it was north of 5%.
US Vice President Joe Biden is in China this week and will welcome the news on China’s currency; while at the same time having his ‘the-US-is-good-for-it debts’ cap very much in hand.
It may also be the case that the Yuan will begin appreciating against other major currencies: in a torpid world, China remains the fastest growing major economy. Indeed, while the Chinese currency has risen nearly 7% since being de-pegged, its nominal effective exchange rate against a trade-weighted basket of others, has fallen by some 4.5% since June 2010, according to the Bank for International Settlements.
Soft landing
More broadly, support for a soft landing for the economy has come from The Conference Board (TCB), a US research group. It’s leading index for China rose 1% in June to 158.9, which follows a 0.6% gain in May. “The economy is significantly moderating right now and also over the next couple of months. We still expect it to be pretty much a soft landing”. However, beyond six months, the Chinese economy may face “more problems” as a result of bank lending which remains at levels which are probably not sustainable, added TCB. That said, new lending in July was the lowest this year at Yuan 492.6 billion ($77 billion) and money supply, as measured by M2, rose 14.7% after June’s 15.9%. The same is true of industrial production in July which rose at 14% against June’s 15.1%. Producer prices, however, remain a concern at +7.5% in July versus 7.1% in June.
This trend towards economic moderation is supported by the State Information Center which says GDP will slow from 9.5% in Q2 to 9.3% in Q3. Inflows of capital will help sustain growth, although this also impacts on PBOC policies to control inflation. That said, UBS sees CPI moderating to 4% by the year end.
Nor is there any let up in FDI or Foreign Direct Investment in China which rose 19.8% in July to $8.3 billion from a year earlier; and for the first seven months of the year, the increase was 18.6% to $69.2 billion, according to the Ministry of Commerce. The same goes for fixed asset investment (ex. rural households) which was 25.4% ahead in the seven months January through July. And, in July itself, retail sales rose 17.2% with car sales ahead 6.7%. Indeed, China’s growth and expanding consumer market have encouraged companies including Nissan ($7.8 billion by 2015) and McDonalds to increase their presence; the latter reckons on opening an outlet a day in China over the next three to four years.
It was, thus, perhaps surprising that China’s trade surplus in July ($31.5 billion) was the highest for more than 24 months as exports hit record levels: up an annualised 20.4% to $175 billion. And this despite the fact that imports in July rose by more in percentage terms at +22.9%; but they were worth less at $143.6 billion. Similarly, China’s current account surplus jumped to some $70 billion in Q2 said SAFE i.e. the State Administration of Foreign Exchange. This means it has more than doubled between the ends of Q1 (from $29 billion) and Q2.
Local authority debt
Turning to the vexed question of local authority debt, the Chairman of the China Bank Regulatory, Liu Mingkang, said today that the clean-up of local government debt is moving ahead smoothly and that risk from more than $1 trillion in loans is under control. He also reiterated that Chinese banks are prohibited from lending to local governments that do not meet loan requirements.
The Ministry of Finance (MOF) has also sought to calm the markets on the scale and efficacy of local government debt. As we know, S&P estimates that as much as 30% of China’s lending to local governments may go sour, after the loan book reached Yuan 10.7 trillion ($1.7 trillion) at the end of 2010 (and Moody’s thinks it is more than this – which is disputed by MOF). Similarly, Societe Generale is also cautious saying that the banking sector’s non-performing loan ratio is already at 7% and local government debts could push that above 16%. Separately, the China Securities Journal says that local governments will see Yuan 4.6 trillion of debt (or 43% of the total) mature by next year. Similarly, the risk weighting for banks on local government loans is 300%, it says.
MOF has admitted that the ability of some regions to meet liabilities is weak; and some local governments rely too heavily on land income to pay back debt. However, it also says that China’s local governments have fixed assets, land, natural resources and many other assets; and the national economy is at a stage of fast growth. MOF is also reported to have drafted a preliminary plan which would allow some provincial and city governments to sell bonds to investors on a trial basis. And, some Yuan 2.1 trillion of local government liabilities are also believed to have been reclassified as normal corporate credit.
US debt
Turning to the international markets, it is also interesting/perplexing that China has raised its holdings of US government debt for a third straight month to $1.17 trillion in June; and this included the first bill purchases since January. Other foreign investors, meantime, were sellers of Treasuries for the first time since 2009. Is this because China believes in the US or that it simply wants more power over its largest trading partner?
ACC
Finally, I must mention my old friend Anhui Conch Cement, the Nation’s largest cement producer, and a first class barometer of domestic economic health. Its H1 net income rose 234% to Yuan 6 billion ($939 million) and, this week, its share price (Yuan 25.52) is within Yuan 4.0 of its all time high.
“The China story will remain appealing for many years to come” - Fang Sihai, Chief economist at Hong Yuan Securities
SHANGHAI COMPOSITE
Today: -0.26% to 2,601.26 at close
This week: +0.31%
Last week: -1.27%
August: -3.7%
YTD: -7.4%
Year ago: -2.6%
HANG SENG:
Today: +0.38% to 20,289.03 at close
This week: +3.41%
Last week: -6.33%
August: -9.6%
YTD: -11.9%
Year ago: -4.0%
OIL: $87.27
GOLD: $1796.10
(new spot intra-day high of $1,817.60 on 11/08/11)
EURO/$ SPOT: 1.4379
Okay, the new Yuan rate was recorded on Tuesday just before the close of business in China – and today it has eased a little to 6.3873 (the last time I looked). However, probable heir apparent to the PRC Premiership, Li Keqiang (56) is in Hong Kong today throwing Yuan around like a man with no hands. Ostensibly he is fronting the China Ministry of Finance’s Yuan 20 billion ($3.1 billion) ‘dim sum’ international bond offer (the largest ever) which will be launched tomorrow. However, he also said that foreign investors will now be allowed to buy mainland securities up to an initial quota, also, of Yuan 20 billion; although no timetable for this ‘mini-QFII’ has been set. Plus he pledged support for Hong Kong’s financial sector; and he’s only been in town one day.
The clever cash now says that the Yuan is in the front line in the battle against domestic inflation (+6.5% in July including food at +14.8%), while interest rates and RRRs are on leave. Note, too, that the seven day repurchase or repo rate is, today, at 3.23% (again, the last time I looked); at the end of July it was north of 5%.
US Vice President Joe Biden is in China this week and will welcome the news on China’s currency; while at the same time having his ‘the-US-is-good-for-it debts’ cap very much in hand.
It may also be the case that the Yuan will begin appreciating against other major currencies: in a torpid world, China remains the fastest growing major economy. Indeed, while the Chinese currency has risen nearly 7% since being de-pegged, its nominal effective exchange rate against a trade-weighted basket of others, has fallen by some 4.5% since June 2010, according to the Bank for International Settlements.
Soft landing
More broadly, support for a soft landing for the economy has come from The Conference Board (TCB), a US research group. It’s leading index for China rose 1% in June to 158.9, which follows a 0.6% gain in May. “The economy is significantly moderating right now and also over the next couple of months. We still expect it to be pretty much a soft landing”. However, beyond six months, the Chinese economy may face “more problems” as a result of bank lending which remains at levels which are probably not sustainable, added TCB. That said, new lending in July was the lowest this year at Yuan 492.6 billion ($77 billion) and money supply, as measured by M2, rose 14.7% after June’s 15.9%. The same is true of industrial production in July which rose at 14% against June’s 15.1%. Producer prices, however, remain a concern at +7.5% in July versus 7.1% in June.
This trend towards economic moderation is supported by the State Information Center which says GDP will slow from 9.5% in Q2 to 9.3% in Q3. Inflows of capital will help sustain growth, although this also impacts on PBOC policies to control inflation. That said, UBS sees CPI moderating to 4% by the year end.
Nor is there any let up in FDI or Foreign Direct Investment in China which rose 19.8% in July to $8.3 billion from a year earlier; and for the first seven months of the year, the increase was 18.6% to $69.2 billion, according to the Ministry of Commerce. The same goes for fixed asset investment (ex. rural households) which was 25.4% ahead in the seven months January through July. And, in July itself, retail sales rose 17.2% with car sales ahead 6.7%. Indeed, China’s growth and expanding consumer market have encouraged companies including Nissan ($7.8 billion by 2015) and McDonalds to increase their presence; the latter reckons on opening an outlet a day in China over the next three to four years.
It was, thus, perhaps surprising that China’s trade surplus in July ($31.5 billion) was the highest for more than 24 months as exports hit record levels: up an annualised 20.4% to $175 billion. And this despite the fact that imports in July rose by more in percentage terms at +22.9%; but they were worth less at $143.6 billion. Similarly, China’s current account surplus jumped to some $70 billion in Q2 said SAFE i.e. the State Administration of Foreign Exchange. This means it has more than doubled between the ends of Q1 (from $29 billion) and Q2.
Local authority debt
Turning to the vexed question of local authority debt, the Chairman of the China Bank Regulatory, Liu Mingkang, said today that the clean-up of local government debt is moving ahead smoothly and that risk from more than $1 trillion in loans is under control. He also reiterated that Chinese banks are prohibited from lending to local governments that do not meet loan requirements.
The Ministry of Finance (MOF) has also sought to calm the markets on the scale and efficacy of local government debt. As we know, S&P estimates that as much as 30% of China’s lending to local governments may go sour, after the loan book reached Yuan 10.7 trillion ($1.7 trillion) at the end of 2010 (and Moody’s thinks it is more than this – which is disputed by MOF). Similarly, Societe Generale is also cautious saying that the banking sector’s non-performing loan ratio is already at 7% and local government debts could push that above 16%. Separately, the China Securities Journal says that local governments will see Yuan 4.6 trillion of debt (or 43% of the total) mature by next year. Similarly, the risk weighting for banks on local government loans is 300%, it says.
MOF has admitted that the ability of some regions to meet liabilities is weak; and some local governments rely too heavily on land income to pay back debt. However, it also says that China’s local governments have fixed assets, land, natural resources and many other assets; and the national economy is at a stage of fast growth. MOF is also reported to have drafted a preliminary plan which would allow some provincial and city governments to sell bonds to investors on a trial basis. And, some Yuan 2.1 trillion of local government liabilities are also believed to have been reclassified as normal corporate credit.
US debt
Turning to the international markets, it is also interesting/perplexing that China has raised its holdings of US government debt for a third straight month to $1.17 trillion in June; and this included the first bill purchases since January. Other foreign investors, meantime, were sellers of Treasuries for the first time since 2009. Is this because China believes in the US or that it simply wants more power over its largest trading partner?
ACC
Finally, I must mention my old friend Anhui Conch Cement, the Nation’s largest cement producer, and a first class barometer of domestic economic health. Its H1 net income rose 234% to Yuan 6 billion ($939 million) and, this week, its share price (Yuan 25.52) is within Yuan 4.0 of its all time high.
“The China story will remain appealing for many years to come” - Fang Sihai, Chief economist at Hong Yuan Securities
SHANGHAI COMPOSITE
Today: -0.26% to 2,601.26 at close
This week: +0.31%
Last week: -1.27%
August: -3.7%
YTD: -7.4%
Year ago: -2.6%
HANG SENG:
Today: +0.38% to 20,289.03 at close
This week: +3.41%
Last week: -6.33%
August: -9.6%
YTD: -11.9%
Year ago: -4.0%
OIL: $87.27
GOLD: $1796.10
(new spot intra-day high of $1,817.60 on 11/08/11)
EURO/$ SPOT: 1.4379
Monday 15 August 2011
Real estate special (August No. 2): Super-tanker
It is hard to believe that the Chinese property market is slowing down after reading the statistics for July. Investment was up 34% at Yuan 3.2 trillion in the first seven months of the year with sales running 26% to the good, over the same period. Furthermore, when looking at the first half comprarative percentages, these were both lower at 33% and 24% respectively. For the bears, they might scratch at floor space under construction which was up ‘only’ 31% in the first seven months (at 4.2 billion square metres) after +32% in H1. Same goes for the Real Estate Climate Index which dipped from 101.75 in June to 101.50 in July (in October last year it was 103.57).
On a brighter note was funding from ‘own funds’ rising 34%, while mortgages dipped 5%. Talk about cash under the mattress? I also think China Vanke’s fall-out in the month of July, with contracted sales (as opposed to net) off 32%, was an individual aberration.
In Hong Kong, though, there is no such ambiguity and, as the economy dipped in Q2 (with GDP off 0.5% quarter on quarter), so the housing market is under the cosh. Asking prices are down 10%, with more to come, and a key land auction this month came in a reported 30% below expectations.
Of course, the PRC real estate market will slow down, because the Government is intent on it; especially price appreciation. And there are clues, with both Beijing and Shanghai sitting on unsold housing stock equivalent to 10 times monthly sales; and 353 parcels of land at auction failing to sell in the January to July period – which is an increase of 242%. Nonetheless, there is also a 36 million, five year affordable housebuilding programme (albeit that 2012’s annual target has been trimmed from 10 to 8 million).
The domestic real estate market in China is a super-tanker and your average one takes 14 minutes to stop - even when it wants to. A super-tanker also needs two kilometres of ocean to turn around in.
- Robust RE market in first seven months
Metric January-July % change (first 6 months)
Investment Yuan 3.19 trillion +33.6% (32.9%)
Sales (value) Yuan 2.89 trillion +26.1% (24.1%)
Sales (volume) 520.4 million m2 +13.6% (12.9%)
Funds raised Yuan 4.79 trillion +23.1% (21.6%)
Own funds Yuan 1.93 trillion +34.0% (32.7%)
Mortgages Yuan 486.9 million - 5.1% (- 7.9%)
Floor space UC* 4.2 billion m2 +30.8% (31.6%)
Floor space New 1.2 billion m2 +24.9% (23.6%)
RE Climate Index 101.50 (July) 101.75 (June); & 103.57 (Oct)
*UC = under construction
Source: NBS
China’s annualised growth in real estate investment and sales sped up in July even as the Government raised additional controls on the sector. Property investment in China grew by 33.6% in the first seven months of this year to Yuan 3.2 trillion, up from 32.9% in H1. Meantime, actual property sales increased by 26% to Yuan 2.9 trillion over the same period (H1 24%); and as measured by volume, sales rose 13.6% in the January-July period from a year ago to more than 520 million square metres (which is more than 5 billion square feet) with H1 at +12.9%.
Clearly, China's push to build more affordable housing together with and robust buyer reservations last year have galvanised the gains. That said, both China Vanke and Poly RE, have started to reduce prices slightly as the policy outlook turns against them; and more will inevitably follow suit. Indeed, it is reported that large cities such as Beijing and Shanghai have unsold residential property equivalent to more than 10 times their current monthly sales. Chinese banks are also cutting their exposure to the real estate sector, although the banking regulator has repeatedly said it is confident the sector can withstand home prices falling as much as 50%.
All that said, widespread price cuts have not been seen, and home prices in most cities are still rising, albeit at a slower pace.
- China’s regulators tell banks to tighten property lending
It is reported that the Government has told banks to tighten lending for real estate as it anticipates possible credit issues as its constraints on the market make a greater impact. This follows China Banking Regulatory Commission’s edict last month not to extend the maturity of loans to developers, not to grant new credit to help developers repay maturing debt and to set significantly higher standards on loans for commercial properties than residential.
The CBRC has also said that lenders should be vigilant about funds “illegally flowing” into the property market. Similarly, the banks have also been told to be particularly alert to risks in commercial properties, where the regulator said speculative funds are increasingly flowing because of controls in the residential market. There was also been a 70%+ rise in developers raising debt from overseas in the first half.
- China reduces target number of affordable homes in 2012 by 20% to 8 million units
The Chinese government has cut its affordable housing development target by 20% for 2012 to 8 million units, it is reported. But this is fine tuning and the construction of State-subsidised homes is crucial for the success of China's ongoing campaign to control property inflation.
- China tells banks to fund building of low cost housing
Chinese banks should lend to healthy local governments which are building State-subsidised homes, according to the China Banking Regulatory Commission. Indeed, the banking regulator has made it clear that it does not want its credit restrictions to starve all local governments of funding. “Banks can lend to local government financing vehicles which have sufficient capital, are well managed, and whose business revenue can cover interest repayments” said the CBRC. Reuters has also reported that loans issued for the construction of affordable housing should not be priced below 0.9% of the PBOC’s benchmark lending rate and should have maturities no longer than 15 years.
- China Vanke’s H1 profit rises 5.9% on sales in smaller cities
The Nation’s largest developer by market value said H1 net profit climbed 5.9% to Yuan 2.98 billion ($460 million) to the end of June as it sold more homes in smaller cities which were less impacted by Government controls. Net revenue, meantime, increased 19% to Yuan 20 billion, which meant that net profitability dipped from 16.8% to 14.9%.
Government’s policy has had an impact on the property industry, but larger quoted companies such as Vanke are holding up well because the measures are aimed at speculative purchases said Daiwa Securities Capital Markets.
Vanke, which expanded into smaller cities such as Qinhuangdao and Taiyuan, completed the sale of 1.1 million square metres (11.8 million square feet) of homes in the six months, accounting for 15% of its target for the year. “With more fittings in the homes we sell, our construction cycle has become longer and we are even lagging behind. But with more homes to be completed in the fourth quarter, we expect the year’s settlement value to be much higher”.
“Vanke achieved great sales amid the Government’s curbs, but the key is delivery” added Daiwa. “They are going to face a big challenge in second half in delivering those homes to customers who paid in advance”.
The developer focused on small and medium sized homes in the first half as it aimed to sell them quickly; and some nine-tenths of its apartments are smaller than 144 square metres.
“Vanke’s sales are better than its peers because most of its products target the mass customer rather than high end properties which the Government is cracking down on” said Credit Suisse. “Their move to smaller cities also helped because the measures in those markets weren’t as strict as those in big cities”.
Vanke, the first among China’s biggest developers to report first half earnings, had Yuan 40.8 billion of cash by the end of June, up 10% from Q1. It is “cautious” about buying more sites, although it will still “seize good opportunities” for land that may emerge this year, continued Credit Suisse.
- Vanke sees July's contracted property sales tumble 32% to Yuan 9.08 billion, month on month; although they are still ahead 64% in the first seven months of 2011
China Vanke reported contracted - but not completed - property sales of Yuan 9.08 billion in July, which is a fall of some 32% month on month (this is not be confused with net revenue - as above). However, contracted property sales in the first seven months of 2011 were Yuan 74.1 billion, up 64% year-on-year; and by volume it agreed to sell 6.37 million square metres of apartments during the same period, which is an increase of 61%.
The developer attributed its July sales drop to a reduced number of properties available for sale in that month, adding that it would accelerate new offerings in the coming months to boost sales.
China Vanke has been faring well under the Government’s strict property polices over the past months, but it is starting to feel the pinch too. “We expect current property measures to continue and play a bigger role in reining in the housing market in the rest of the year. And as developers’ sales are being hampered, competition will be hotting up as we all are trying to reduce as much inventory as possible” it said. The Company also added that it would continue to adopt a prudent approach, which it believes has helped it cope with tough times in the past and underpinned it leading market position.
China Vanke has been cautious in land buying in the first half on concerns of market uncertainties; but expects better opportunities to reserve more land in H2. The developer also initiated a promotion in July to counter pressure from other developers volunteering to cut prices. It offers a slight discount of Yuan 5,000 per unit, which is probably more apparent than real.
- China Overseas Land & Investment see H1 net profit rise 35% to $871 million
China Overseas Land & Investment, a Hong Kong-based builder controlled by the Chinese Construction Ministry, said H1 net profit climbed 35% (including exceptional gains) to HK$6.8 billion ($871 million). Meantime, sales rose 25% to HK$21.9 billion which means a net profit margin of 31.1% (vs 29.0%).
The developer’s profit rose even as China expanded efforts to prick any incipient real estate price bubbles. The Government said last month it will rein in residential prices in smaller cities after limiting home purchases in metropolitan areas including Beijing and Shanghai. “China Overseas diversified portfolio in both the Country’s major and smaller cities helped boost their sales performance and the earnings” added Yuanta Securities. “Looking forward, the developer has sufficient resources to generate profits from projects”.
The Company is “confident” about the medium and long term development of China’s property market, referencing industrialisation and urbanisation.
China Overseas, which builds homes and offices in China, Hong Kong and Macau, said operating profit rose 37% to HK$10.9 billion. Operating profit from mainland China increased 29% from a year earlier, accounting for 79% of the overall result.
The Company’s contracted sales advanced 82.4% in the first seven months from a year earlier to HK$60.3 billion.
“The Company has already achieved more than half of the year’s sales target” said CLSA Asia-Pacific Markets. “China Overseas already operated in those home purchase restriction zones in the first half, so their earnings in the next half will not be much different”. The developer acquired 16 plots in China in the first half and plans to expand its land bank at low cost in the future.
China Overseas cut prices for four projects around the country this year by 10 to 15% from a year earlier, the Company said last month. The price reduction helped boost its market share, added CLSA. For its part, China Overseas said it will not be “over-optimistic” and will follow closely the changes in China’s economy and policies.
- China largest housing contractor sees H1 sales rise 79%
China State Construction Engineering Corporation, the Nation’s largest housing contractor has said that sales in the first seven months of the year rose 79% from a year earlier to Yuan 56.6 billion ($8.8 billion) as it won construction contracts worth a combined Yuan 482.1 billion, which was 51% more than a year earlier.
- Poly Real Estate sees 38% rise in contracted sales in July
China’s second largest developer by market value, said contracted sales in July rose 38% from a year earlier to Yuan 5.1 billion.
- R&F Properties remains confident
Guangzhou-based R&F Properties, whose property projects are principally in first and second tier cities, said sales rebounded in July to Yuan 3.03 billion after a less robust performance in May and June. This meant, too, that in the first seven months, sales rose to Yuan 16.45 billion, which is 41% of its full-year target of Yuan 40 billion. And, this goal remains remains unchanged; however R&F is looking to diversify to lower tier cities including Harbin.
- Hong Kong apartment sellers cut asking prices
Hong Kong house prices - which surged 70% since the end of 2008 - are set for their biggest decline since Lehman Brothers collapsed in September of that year. Slower global and economic growth is cited (Q2’s GDP fell 0.5% versus Q1) as well as Government policy of increasing land supply increases.
Already, according to Midland and Centaline, the City’s two largest real estate agents, house prices are being reduced by as much as 10%; and the former already reported that June and July saw the first consecutive falls in price since December 2008. Similarly, UOB Kay Hian says “we should see at least a 5% further correction in the second half if the crisis in the US and Europe deepens”. Home transactions also fell to a 30 month low in July.
Part of the growth in the Hong Kong residential market has been attributed to buyers from other parts of China, which Centaline estimates accounted for about a third of new luxury property purchases in Hong Kong in the first half. This may slow down now as the PRC economy slows and the Government takes policy action on controlling the domestic real estate market. “China periodically undergoes cooling and that is likely to have some knock-on effect on their demand in Hong Kong’s residential market” said Savills. “We don’t expect it to be long lasting and we think previous growth would resume after six to eight months”.
- Key Hong Kong land auction misses expected price
Hong Kong sold a residential site at a lower-than-expected HK$5.5 billion ($704.7 million) at auction ast week. It is reported that the sole bidder was a consortium which includes Kerry Properties (40%), Sino Land (40%) and Manhattan Group (20%). And the site located in Shatin in the New Territories is for for luxury apartments and comprises 23,000 square metres (247,600 square feet) from a gross floor area of 96,000 square metres.
“The (weak) result was a bit of surprise” said Credit Suisse. “It suggests the Government is willing to sell land at a lower price and that land prices may trend down in future”. It also suggest something of a buyers' strike too. Note, too, that a sample of expectations from seven consultants and securities firms pointed to an average price forecast of HK$8.08 billion.
On a brighter note was funding from ‘own funds’ rising 34%, while mortgages dipped 5%. Talk about cash under the mattress? I also think China Vanke’s fall-out in the month of July, with contracted sales (as opposed to net) off 32%, was an individual aberration.
In Hong Kong, though, there is no such ambiguity and, as the economy dipped in Q2 (with GDP off 0.5% quarter on quarter), so the housing market is under the cosh. Asking prices are down 10%, with more to come, and a key land auction this month came in a reported 30% below expectations.
Of course, the PRC real estate market will slow down, because the Government is intent on it; especially price appreciation. And there are clues, with both Beijing and Shanghai sitting on unsold housing stock equivalent to 10 times monthly sales; and 353 parcels of land at auction failing to sell in the January to July period – which is an increase of 242%. Nonetheless, there is also a 36 million, five year affordable housebuilding programme (albeit that 2012’s annual target has been trimmed from 10 to 8 million).
The domestic real estate market in China is a super-tanker and your average one takes 14 minutes to stop - even when it wants to. A super-tanker also needs two kilometres of ocean to turn around in.
- Robust RE market in first seven months
Metric January-July % change (first 6 months)
Investment Yuan 3.19 trillion +33.6% (32.9%)
Sales (value) Yuan 2.89 trillion +26.1% (24.1%)
Sales (volume) 520.4 million m2 +13.6% (12.9%)
Funds raised Yuan 4.79 trillion +23.1% (21.6%)
Own funds Yuan 1.93 trillion +34.0% (32.7%)
Mortgages Yuan 486.9 million - 5.1% (- 7.9%)
Floor space UC* 4.2 billion m2 +30.8% (31.6%)
Floor space New 1.2 billion m2 +24.9% (23.6%)
RE Climate Index 101.50 (July) 101.75 (June); & 103.57 (Oct)
*UC = under construction
Source: NBS
China’s annualised growth in real estate investment and sales sped up in July even as the Government raised additional controls on the sector. Property investment in China grew by 33.6% in the first seven months of this year to Yuan 3.2 trillion, up from 32.9% in H1. Meantime, actual property sales increased by 26% to Yuan 2.9 trillion over the same period (H1 24%); and as measured by volume, sales rose 13.6% in the January-July period from a year ago to more than 520 million square metres (which is more than 5 billion square feet) with H1 at +12.9%.
Clearly, China's push to build more affordable housing together with and robust buyer reservations last year have galvanised the gains. That said, both China Vanke and Poly RE, have started to reduce prices slightly as the policy outlook turns against them; and more will inevitably follow suit. Indeed, it is reported that large cities such as Beijing and Shanghai have unsold residential property equivalent to more than 10 times their current monthly sales. Chinese banks are also cutting their exposure to the real estate sector, although the banking regulator has repeatedly said it is confident the sector can withstand home prices falling as much as 50%.
All that said, widespread price cuts have not been seen, and home prices in most cities are still rising, albeit at a slower pace.
- China’s regulators tell banks to tighten property lending
It is reported that the Government has told banks to tighten lending for real estate as it anticipates possible credit issues as its constraints on the market make a greater impact. This follows China Banking Regulatory Commission’s edict last month not to extend the maturity of loans to developers, not to grant new credit to help developers repay maturing debt and to set significantly higher standards on loans for commercial properties than residential.
The CBRC has also said that lenders should be vigilant about funds “illegally flowing” into the property market. Similarly, the banks have also been told to be particularly alert to risks in commercial properties, where the regulator said speculative funds are increasingly flowing because of controls in the residential market. There was also been a 70%+ rise in developers raising debt from overseas in the first half.
- China reduces target number of affordable homes in 2012 by 20% to 8 million units
The Chinese government has cut its affordable housing development target by 20% for 2012 to 8 million units, it is reported. But this is fine tuning and the construction of State-subsidised homes is crucial for the success of China's ongoing campaign to control property inflation.
- China tells banks to fund building of low cost housing
Chinese banks should lend to healthy local governments which are building State-subsidised homes, according to the China Banking Regulatory Commission. Indeed, the banking regulator has made it clear that it does not want its credit restrictions to starve all local governments of funding. “Banks can lend to local government financing vehicles which have sufficient capital, are well managed, and whose business revenue can cover interest repayments” said the CBRC. Reuters has also reported that loans issued for the construction of affordable housing should not be priced below 0.9% of the PBOC’s benchmark lending rate and should have maturities no longer than 15 years.
- China Vanke’s H1 profit rises 5.9% on sales in smaller cities
The Nation’s largest developer by market value said H1 net profit climbed 5.9% to Yuan 2.98 billion ($460 million) to the end of June as it sold more homes in smaller cities which were less impacted by Government controls. Net revenue, meantime, increased 19% to Yuan 20 billion, which meant that net profitability dipped from 16.8% to 14.9%.
Government’s policy has had an impact on the property industry, but larger quoted companies such as Vanke are holding up well because the measures are aimed at speculative purchases said Daiwa Securities Capital Markets.
Vanke, which expanded into smaller cities such as Qinhuangdao and Taiyuan, completed the sale of 1.1 million square metres (11.8 million square feet) of homes in the six months, accounting for 15% of its target for the year. “With more fittings in the homes we sell, our construction cycle has become longer and we are even lagging behind. But with more homes to be completed in the fourth quarter, we expect the year’s settlement value to be much higher”.
“Vanke achieved great sales amid the Government’s curbs, but the key is delivery” added Daiwa. “They are going to face a big challenge in second half in delivering those homes to customers who paid in advance”.
The developer focused on small and medium sized homes in the first half as it aimed to sell them quickly; and some nine-tenths of its apartments are smaller than 144 square metres.
“Vanke’s sales are better than its peers because most of its products target the mass customer rather than high end properties which the Government is cracking down on” said Credit Suisse. “Their move to smaller cities also helped because the measures in those markets weren’t as strict as those in big cities”.
Vanke, the first among China’s biggest developers to report first half earnings, had Yuan 40.8 billion of cash by the end of June, up 10% from Q1. It is “cautious” about buying more sites, although it will still “seize good opportunities” for land that may emerge this year, continued Credit Suisse.
- Vanke sees July's contracted property sales tumble 32% to Yuan 9.08 billion, month on month; although they are still ahead 64% in the first seven months of 2011
China Vanke reported contracted - but not completed - property sales of Yuan 9.08 billion in July, which is a fall of some 32% month on month (this is not be confused with net revenue - as above). However, contracted property sales in the first seven months of 2011 were Yuan 74.1 billion, up 64% year-on-year; and by volume it agreed to sell 6.37 million square metres of apartments during the same period, which is an increase of 61%.
The developer attributed its July sales drop to a reduced number of properties available for sale in that month, adding that it would accelerate new offerings in the coming months to boost sales.
China Vanke has been faring well under the Government’s strict property polices over the past months, but it is starting to feel the pinch too. “We expect current property measures to continue and play a bigger role in reining in the housing market in the rest of the year. And as developers’ sales are being hampered, competition will be hotting up as we all are trying to reduce as much inventory as possible” it said. The Company also added that it would continue to adopt a prudent approach, which it believes has helped it cope with tough times in the past and underpinned it leading market position.
China Vanke has been cautious in land buying in the first half on concerns of market uncertainties; but expects better opportunities to reserve more land in H2. The developer also initiated a promotion in July to counter pressure from other developers volunteering to cut prices. It offers a slight discount of Yuan 5,000 per unit, which is probably more apparent than real.
- China Overseas Land & Investment see H1 net profit rise 35% to $871 million
China Overseas Land & Investment, a Hong Kong-based builder controlled by the Chinese Construction Ministry, said H1 net profit climbed 35% (including exceptional gains) to HK$6.8 billion ($871 million). Meantime, sales rose 25% to HK$21.9 billion which means a net profit margin of 31.1% (vs 29.0%).
The developer’s profit rose even as China expanded efforts to prick any incipient real estate price bubbles. The Government said last month it will rein in residential prices in smaller cities after limiting home purchases in metropolitan areas including Beijing and Shanghai. “China Overseas diversified portfolio in both the Country’s major and smaller cities helped boost their sales performance and the earnings” added Yuanta Securities. “Looking forward, the developer has sufficient resources to generate profits from projects”.
The Company is “confident” about the medium and long term development of China’s property market, referencing industrialisation and urbanisation.
China Overseas, which builds homes and offices in China, Hong Kong and Macau, said operating profit rose 37% to HK$10.9 billion. Operating profit from mainland China increased 29% from a year earlier, accounting for 79% of the overall result.
The Company’s contracted sales advanced 82.4% in the first seven months from a year earlier to HK$60.3 billion.
“The Company has already achieved more than half of the year’s sales target” said CLSA Asia-Pacific Markets. “China Overseas already operated in those home purchase restriction zones in the first half, so their earnings in the next half will not be much different”. The developer acquired 16 plots in China in the first half and plans to expand its land bank at low cost in the future.
China Overseas cut prices for four projects around the country this year by 10 to 15% from a year earlier, the Company said last month. The price reduction helped boost its market share, added CLSA. For its part, China Overseas said it will not be “over-optimistic” and will follow closely the changes in China’s economy and policies.
- China largest housing contractor sees H1 sales rise 79%
China State Construction Engineering Corporation, the Nation’s largest housing contractor has said that sales in the first seven months of the year rose 79% from a year earlier to Yuan 56.6 billion ($8.8 billion) as it won construction contracts worth a combined Yuan 482.1 billion, which was 51% more than a year earlier.
- Poly Real Estate sees 38% rise in contracted sales in July
China’s second largest developer by market value, said contracted sales in July rose 38% from a year earlier to Yuan 5.1 billion.
- R&F Properties remains confident
Guangzhou-based R&F Properties, whose property projects are principally in first and second tier cities, said sales rebounded in July to Yuan 3.03 billion after a less robust performance in May and June. This meant, too, that in the first seven months, sales rose to Yuan 16.45 billion, which is 41% of its full-year target of Yuan 40 billion. And, this goal remains remains unchanged; however R&F is looking to diversify to lower tier cities including Harbin.
- Hong Kong apartment sellers cut asking prices
Hong Kong house prices - which surged 70% since the end of 2008 - are set for their biggest decline since Lehman Brothers collapsed in September of that year. Slower global and economic growth is cited (Q2’s GDP fell 0.5% versus Q1) as well as Government policy of increasing land supply increases.
Already, according to Midland and Centaline, the City’s two largest real estate agents, house prices are being reduced by as much as 10%; and the former already reported that June and July saw the first consecutive falls in price since December 2008. Similarly, UOB Kay Hian says “we should see at least a 5% further correction in the second half if the crisis in the US and Europe deepens”. Home transactions also fell to a 30 month low in July.
Part of the growth in the Hong Kong residential market has been attributed to buyers from other parts of China, which Centaline estimates accounted for about a third of new luxury property purchases in Hong Kong in the first half. This may slow down now as the PRC economy slows and the Government takes policy action on controlling the domestic real estate market. “China periodically undergoes cooling and that is likely to have some knock-on effect on their demand in Hong Kong’s residential market” said Savills. “We don’t expect it to be long lasting and we think previous growth would resume after six to eight months”.
- Key Hong Kong land auction misses expected price
Hong Kong sold a residential site at a lower-than-expected HK$5.5 billion ($704.7 million) at auction ast week. It is reported that the sole bidder was a consortium which includes Kerry Properties (40%), Sino Land (40%) and Manhattan Group (20%). And the site located in Shatin in the New Territories is for for luxury apartments and comprises 23,000 square metres (247,600 square feet) from a gross floor area of 96,000 square metres.
“The (weak) result was a bit of surprise” said Credit Suisse. “It suggests the Government is willing to sell land at a lower price and that land prices may trend down in future”. It also suggest something of a buyers' strike too. Note, too, that a sample of expectations from seven consultants and securities firms pointed to an average price forecast of HK$8.08 billion.
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