Everyone in the UK (Bank Holiday) and the US (Memorial Day) has a long weekend, including today. For the Chinese people it is a normal working day – at a time when they could do with a break i.e. check out today’s headlines which focus on the prospect of higher interest rates, power outages and, in real estate, a possible extension of the property tax; not to mention the drought and civil unrest in Mongolia.
The known enemy here is Inflation (okay this is better than his depressive brother ‘Deflation’). And, as is well documented, the bulls maintain that he is a temporary visitor, while the bears view him as one who has come to stay. Food prices are, of course, the prime consideration (accounting for 30% of CPI's suitcase) and this won’t be helped by the drought in and around the Yangtze. In fact water levels in the river’s midstream are six metres lower than the same time a year ago, with rainfall only a fifth of what it was in 2010, according to the China Daily. Similarly, China’s meteorological office said on Wednesday that average rainfall in Anhui, Jiangsu, Hunan, Hubei, Jiangxi, Zhejiang and Shanghai, which are China’s major rice producing areas, is the lowest since 1954.
This makes the words of iconic US investor Jim Rogers all the more pertinent. “I don’t mind if China has civil war, epidemics, panics, depressions, all of that. You can recover from that. The only thing you cannot recover from is water. If China doesn’t solve its water problems than there’s no China story”. That said, Rogers (who is not everyone’s cup of green tea) also acknowledged that the Nation is spending large amounts of money to solve this problem.
The Shanghai Composite also dipped again today (-0.13%) for the eighth in a row, which is the longest losing streak (-5.7%) since December 2008. With one trading day to go, too, the month of May is now 7.1% in the red (and they say April is the cruellest month) and 11.4% off its 2011 peak on 19 April; not to mention being 2.5% negative in 2011 so far. Today, developers were in sharp focus, too, as Xinhua reported that a property tax trial in two or three principal cities may be expanded nationwide. Similarly, a number of academics at a weekend conference talked about a fall in house prices of 10% or more. No surprise then that the Property Sub-index within the Composite fell 1.5% (to 3334.5) including China Vanke, the Nation’s number one developer, at a 10 month low (-1.3% to Yuan 7.80).
The money markets had some better news, if curate-like. The Yuan touched 6.4858 to the US dollar on 26 May, the highest since 1993. Many commentators claim that China’s currency could be used to ease Inflation’s temper. These include Tim Geithner and a number of his countrymen. And it was significant, at the weekend, that the US Treasury stopped short of branding China a ‘currency manipulator’; despite adding that the progress on letting the Yuan rise was “insufficient”. The cynical view here, too, is that the report was deliberately released on a holiday weekend so as not to attract too much attention.
“If we are facing in the right direction; all we have to do is keep on walking” - Buddhist Saying
SHANGHAI COMPOSITE
Today: -0.13% to 2,706.36 at close
Last week: -5.20%
March: -0.8%
April: -0.6%
May (to date): -7.1%
YTD: -3.6%
Since 05/07/10: +14.3%
Since 08/11/10: -14.6%
HANG SENG
Today: +0.29% to 23,184.32 at close
Last week: -0.35%
March: +0.8%
April: +0.8%
May (to date): -2.3%
YTD: +0.7%
Since 25/05/10 +22.1%
Since 08/11/10: -7.1%
OIL FUTURES: $99.97
GOLD FUTURES: $1536.30
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4286
EQUITIES
• Jim Rogers says China’s number one issue is water
• Stocks fall and rise on tightening concerns; led by developers
• Societe Generale is “underweight” on China stocks
ECONOMY
• Copper gains on optimism about Chinese demand
• Home appliance sees sharp fall in the rate of growth in April; less so for first four
MONEY
• Yuan completes second sees weekly gain
• US does not name China as a currency manipulator
REAL ESTATE
• Home prices likely to fall by more than 10% this year
DOMESTIC
• Emergency response to drought
• Drought in China raises worries about global grain supply
• Non-infectious chronic diseases become major health threat, claiming 85% of deaths in China
• China to change mine rules after Mongolia unrest
INTERNATIONAL
• Chinese top legislator calls for deeper business cooperation with South Africa
Monday 30 May 2011
China's steel demand to rise 12 to 25% by 2015
Steel demand in the World’s biggest consumer, may rise by as much as a quarter by 2015 compared with demand last year, according to a projection from the China Iron & Steel Association (CISA), which represents producers. Consumption may increase by between 12 and 25 % from the level in 2010 to as much as 750 million metric tons in 2015, according to Luo Bingsheng, Deputy Party Secretary of the Association. He was speaking at a conference in Shanghai.
China’s steel production in 2011 will exceed 680 million tons, added Li Xinchuang, Deputy Secretary-General at CISA. This estimate is based on a forecast that China’s economy will grow by more than 9%. China’s apparent steel consumption, which includes metal for stockpiles, averaged 17% a year from 2006 to 2010.
CISA has also suggested that the Shanghai Futures Exchange list futures for medium-to-thick steel strips so producers and users can hedge price risks. Some 43% of the steel made in China is distributed by traders, which make prices more volatile, Li added.
MORE NEWS
Steel makers profits dip in first four months of 2011
China’s 77 largest steelmakers’ aggregate profit fell 2.1% to Yuan 32.9 billion between January and April, says CISA. Similarly, the average margin was only 2.9% because of high raw material costs. These mills generated combined profit of Yuan 90 billion last year.
China’s steel production in 2011 will exceed 680 million tons, added Li Xinchuang, Deputy Secretary-General at CISA. This estimate is based on a forecast that China’s economy will grow by more than 9%. China’s apparent steel consumption, which includes metal for stockpiles, averaged 17% a year from 2006 to 2010.
CISA has also suggested that the Shanghai Futures Exchange list futures for medium-to-thick steel strips so producers and users can hedge price risks. Some 43% of the steel made in China is distributed by traders, which make prices more volatile, Li added.
MORE NEWS
Steel makers profits dip in first four months of 2011
China’s 77 largest steelmakers’ aggregate profit fell 2.1% to Yuan 32.9 billion between January and April, says CISA. Similarly, the average margin was only 2.9% because of high raw material costs. These mills generated combined profit of Yuan 90 billion last year.
Friday 27 May 2011
The Inflation Lotto
Sales of lottery tickets in China rose by an annualised 33.3% in the first four months of the year to almost Yuan 65 billion ($10 billion) with the official explanation being the popularity of new quiz-type lottery games and trial sales on-line.
Gambling by China’s Government is less endemic. It tends to adopt a more pragmatic and empirical approach (some commentators call this ‘trial and error’). Nonetheless, in what has been a difficult week (the worst drought in 50 years, probable power shortages, explosions and a falling equity market), it is tenable that Hu, Wen and Zhou must be longing for a win. However, the only betting success for the central authorities, at this time, is the ‘Inflation Lotto’.
According to Huachuang Securities the inflation rate may increase to as much as 5.5% in May, which follows 5.3% in April, the fastest pace since 2008. Huachuang says that this is being driven by vegetable prices in southern China which has been impacted by the drought. Vegetables account for about 20% of food costs which, in turn, makes up about 30% of consumer prices.
Other commentators believe that Q2 could well be the peak for inflation and that it may then subside, a view which could also keep further interest rate rises at bay. However the Shanghai Composite had its biggest weekly drop (4.7%) this week since June last year. This also takes May’s deficit (with two trading days to go) to 6%, which is also the worst June 2010; and for the year-to-date, the short-fall is now 2.6%. Investors are worried that the tightening is overdone and concerns have widened to a slowdown in earnings and economic growth – and not just inflation, says Jingxi Investment Management. “The market is still trying to find a bottom”. ICBC Credit Suisse concurs.
Meantime, the Lex Column in the FT says private investors, who dominate the 159 million registered trading accounts in China, see property as a better bet for returns right now than the stock market. Soufun also said that house prices in Shanghai and Shenzhen rose in the week ending 22 May (although they declined in Guangzhou). Note, too, that the property tax introduced in two or three conurbations has had little impact in reality; in Chongqing, for example, it has raised just $120,000 since January.
For is part, Barings Asset Management says stocks may rally after the central bank ends its tightening policy, possibly by as soon as the end of the third quarter. “Once it peaks, the market will have a very strong bounce” and “investors will come back to China at the end of third quarter or fourth quarter”. Barings likes consumer and health care companies but says investors should wait before investing in “cheap” property and banking stocks. In the same vein, HSBC says that share prices in China could rise by 20% by year-end, while UBS sees no hard landing. Similarly, while Goldman Sachs would not rule out a correction of up to 5 to 10% near term, triggered by earnings per share cuts, it would buy on such dips given low earnings risks, valuations and the likely policy inflection. Goldmans expects inflation to peak in June and forecasts normalisation of policy sometime in Q3 2011. It has, however, downgraded steel, aluminium and industrial stocks to “underweight” from “neutral,” while keeping property and bank shares as top picks.
Industrial profit growth also shows that the medicine is working, as it slowed in the first four months of the year to (a still remarkable) 29.7% - down from 32% a year ago (and 34% in January and February). And, China is ranked first among 22 emerging Asian economies as the country most likely to maintain steady and rapid growth over the next five years, according to the Bloomberg Economic Momentum Index for Developing Asia (India is two).
The money market agrees and the repo rate fell for the first time in a week today (off 64 basis points to 4.37%) as Citigroup and Societe Generale forecast that Yuan 550 to 600 billion ($85-92 billion) could flow into the market by way of maturing bills and repurchase agreements. Finally, even the Yuan is playing ball as it touched its highest level (6.4858 to the US dollar) since July 1993.
“You know you're gonna live through the rain. Lord you gotta keep the faith” – Jon Bon Jovi
SHANGHAI COMPOSITE
Today: -0.21% to 2,709.95 at close
This week: -4.27%
March: -0.8%
April: -0.6%
May (to date): -6.0%
YTD: -2.6%
Since 05/07/10: +15.8%
Since 08/11/10: -13.4%
HANG SENG:
Today: +0.95% to 23,118.07 at close
This week: -0.35%
March: +0.8%
April: +0.8%
May (to date): -2.5%
YTD: -1.4%
Since 25/05/10 +21.8%
Since 08/11/10: -7.4%
OIL FUTURES: $100.64
GOLD FUTURES: $1526.80
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4202
HEADLINES
ECONOMY
• Industrial profit growth slows
• China is ahead of India as the most likely to grow
• China will invest some $955 billion on transport infrastructure by 2015; plus $615 billion in water conservation projects through 2020
MONEY
• Money market rate declines by the most in a week as bills mature
• Yuan heads for a weekly gain and hits strongest level (6.4858) since July 1993
• China FX reserves climb by $138 billion in Q1
EQUITIES
• China still offers value; and no hard landing says UBS
• A further 5 to 10% correction in China share prices is likely, says Goldman Sachs
• Slumping Chinese stocks may extend their decline, says ICBC Credit Suisse AM
• Anhui Conch is a “buy” on affordable housing build
DOMESTIC
• Explosions in Jiangxi Province kill two people, including the bomber
• Worst drought in 50 years begins to impact Shanghai
• China's April lottery sales up 32.2% in April; and 33.3% in first four months of 2011
REAL ESTATE
• China faces difficulty extending pilot property tax, says senior housing official
• Jim Chanos is even more bearish on Chinese property
INDUSTRY
• Coal production up 11.1% in first four months
• Automobile sales may fall 10% this year, says China Automotive
• Toy prices rise as wages in China increase
INTERNATIONAL
• China faces losses on $18.8 billion of Libyan Contracts, says Economic Weekly
• North Korea’s dependence on China for trade rises; as Kim completes his third visit in a year
HONG KONG
• Hong Kong’s April inflation accelerates to a 32 month high on food and housing
Gambling by China’s Government is less endemic. It tends to adopt a more pragmatic and empirical approach (some commentators call this ‘trial and error’). Nonetheless, in what has been a difficult week (the worst drought in 50 years, probable power shortages, explosions and a falling equity market), it is tenable that Hu, Wen and Zhou must be longing for a win. However, the only betting success for the central authorities, at this time, is the ‘Inflation Lotto’.
According to Huachuang Securities the inflation rate may increase to as much as 5.5% in May, which follows 5.3% in April, the fastest pace since 2008. Huachuang says that this is being driven by vegetable prices in southern China which has been impacted by the drought. Vegetables account for about 20% of food costs which, in turn, makes up about 30% of consumer prices.
Other commentators believe that Q2 could well be the peak for inflation and that it may then subside, a view which could also keep further interest rate rises at bay. However the Shanghai Composite had its biggest weekly drop (4.7%) this week since June last year. This also takes May’s deficit (with two trading days to go) to 6%, which is also the worst June 2010; and for the year-to-date, the short-fall is now 2.6%. Investors are worried that the tightening is overdone and concerns have widened to a slowdown in earnings and economic growth – and not just inflation, says Jingxi Investment Management. “The market is still trying to find a bottom”. ICBC Credit Suisse concurs.
Meantime, the Lex Column in the FT says private investors, who dominate the 159 million registered trading accounts in China, see property as a better bet for returns right now than the stock market. Soufun also said that house prices in Shanghai and Shenzhen rose in the week ending 22 May (although they declined in Guangzhou). Note, too, that the property tax introduced in two or three conurbations has had little impact in reality; in Chongqing, for example, it has raised just $120,000 since January.
For is part, Barings Asset Management says stocks may rally after the central bank ends its tightening policy, possibly by as soon as the end of the third quarter. “Once it peaks, the market will have a very strong bounce” and “investors will come back to China at the end of third quarter or fourth quarter”. Barings likes consumer and health care companies but says investors should wait before investing in “cheap” property and banking stocks. In the same vein, HSBC says that share prices in China could rise by 20% by year-end, while UBS sees no hard landing. Similarly, while Goldman Sachs would not rule out a correction of up to 5 to 10% near term, triggered by earnings per share cuts, it would buy on such dips given low earnings risks, valuations and the likely policy inflection. Goldmans expects inflation to peak in June and forecasts normalisation of policy sometime in Q3 2011. It has, however, downgraded steel, aluminium and industrial stocks to “underweight” from “neutral,” while keeping property and bank shares as top picks.
Industrial profit growth also shows that the medicine is working, as it slowed in the first four months of the year to (a still remarkable) 29.7% - down from 32% a year ago (and 34% in January and February). And, China is ranked first among 22 emerging Asian economies as the country most likely to maintain steady and rapid growth over the next five years, according to the Bloomberg Economic Momentum Index for Developing Asia (India is two).
The money market agrees and the repo rate fell for the first time in a week today (off 64 basis points to 4.37%) as Citigroup and Societe Generale forecast that Yuan 550 to 600 billion ($85-92 billion) could flow into the market by way of maturing bills and repurchase agreements. Finally, even the Yuan is playing ball as it touched its highest level (6.4858 to the US dollar) since July 1993.
“You know you're gonna live through the rain. Lord you gotta keep the faith” – Jon Bon Jovi
SHANGHAI COMPOSITE
Today: -0.21% to 2,709.95 at close
This week: -4.27%
March: -0.8%
April: -0.6%
May (to date): -6.0%
YTD: -2.6%
Since 05/07/10: +15.8%
Since 08/11/10: -13.4%
HANG SENG:
Today: +0.95% to 23,118.07 at close
This week: -0.35%
March: +0.8%
April: +0.8%
May (to date): -2.5%
YTD: -1.4%
Since 25/05/10 +21.8%
Since 08/11/10: -7.4%
OIL FUTURES: $100.64
GOLD FUTURES: $1526.80
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4202
HEADLINES
ECONOMY
• Industrial profit growth slows
• China is ahead of India as the most likely to grow
• China will invest some $955 billion on transport infrastructure by 2015; plus $615 billion in water conservation projects through 2020
MONEY
• Money market rate declines by the most in a week as bills mature
• Yuan heads for a weekly gain and hits strongest level (6.4858) since July 1993
• China FX reserves climb by $138 billion in Q1
EQUITIES
• China still offers value; and no hard landing says UBS
• A further 5 to 10% correction in China share prices is likely, says Goldman Sachs
• Slumping Chinese stocks may extend their decline, says ICBC Credit Suisse AM
• Anhui Conch is a “buy” on affordable housing build
DOMESTIC
• Explosions in Jiangxi Province kill two people, including the bomber
• Worst drought in 50 years begins to impact Shanghai
• China's April lottery sales up 32.2% in April; and 33.3% in first four months of 2011
REAL ESTATE
• China faces difficulty extending pilot property tax, says senior housing official
• Jim Chanos is even more bearish on Chinese property
INDUSTRY
• Coal production up 11.1% in first four months
• Automobile sales may fall 10% this year, says China Automotive
• Toy prices rise as wages in China increase
INTERNATIONAL
• China faces losses on $18.8 billion of Libyan Contracts, says Economic Weekly
• North Korea’s dependence on China for trade rises; as Kim completes his third visit in a year
HONG KONG
• Hong Kong’s April inflation accelerates to a 32 month high on food and housing
Iron & steel special: "up and down"
It’s been a week of high and low Fe content, with Goldman Sachs being firmly in the former. In fact it single-handedly returned positive sentiment back to commodities with a research note: “we now believe that the risk/ reward once again favours being long commodities. We are shifting back to a near-to medium-term overweight recommendation”.
At the other extreme was the FT’s Lex Column. It said that as long as China “continues its recent pace of development, its share of global steel demand will probably stay at around the current 45% (by comparison, it consumes only 10% of the World’s oil). In that case, the growth rate of global steel production could well stay at the 5% it has registered for the last decade. “The construction of Chinese infrastructure has lifted the global intensity of steel use to levels not seen since the post-War reconstruction of Europe and Japan ended in the early 1970s. That golden period was followed by two decades of minimal growth in global steel production – and dismal profits. “When China is built out, its steel demand should fall. Chinese producers, left with spare capacity, would then be tempted to export into an already well supplied world. That implies another bad decade or two for the industry”. For the record, the FT says that the World currently consumes nearly 0.034 kilogrammes of steel per unit of global GDP. This compares with nearly 0.036 in 1960 but as low as 0.022 in 1990. Food for thought.
Somewhere in between these two, is the inevitability of power cuts which will cause a fall in Chinese steel production. For example, Deutsche Bank says the shortage may reach 35 gigawatts or 3.7% of the Country’s capacity last year; and 35 gigawatts is enough to supply 35 million US households. In turn, this means that production has risen in the first four months of the year by 9.1%; and in the month of April China accounted for 47% of World steel output. As a result, Steel Market Intelligence says inventories are rising.
Of more concern is Mirae Securities view that China steel prices will fall 10% this summer. Similarly, spot iron ore prices have fallen 5.9% in three weeks to $173 at Tianjin; and this despite contract iron ore prices for Vale and Rio in Q3 expected to be little changed (i.e. as much as down 1.2% for Rio).
Back to the ‘highs’, though, Baosteel is doing its bit by finally winning planning permission for a new 10 million metric ton mill in Zhanjiang in Guangdong. As a result, too, some 15 million tons of obsolete capacity will be shut down. Baosteel also, enigmatically said it will seek to consolidate steelmakers in Guangdong; albeit no details are, as yet, forthcoming.
Finally Vale is not bearish (and nor am I) as it invests $2.9 billion to increase the capacity of the Ponta da Madeira terminal in northern Brazil, making it the largest port in the Country by volume. Similarly, Exxaro Resources, a South African coal miner, has made a rare bid ($129 million) in iron ore, with the target being the Aussie miner Territory Resources. This is part of Exxaro seeking to meet its goal of producing 10 million metric tons of iron ore a year. And, finally, Glencore continues to seek further off-take deals in iron ore and may well extend its agreement with London Mining in Sierra Leone.
“For every low there is an equal but opposite high” - Norman Cousins
HEADLINES
IRON ORE
• Vale will hold contract iron ore prices, while Rio dips, says Platts
• Iron ore prices fall 5.9% in three weeks to $173
• London Mining in talks with Glencore on iron sales
• Exxaro offers $130 million cash for Australian iron ore producer, Territory Resources
STEEL
• Steel inventories in China may be rising, says researcher Steel Market Intelligence
• China’s steel production rises 9.1% in first four months
• China’s steel output may fall from June as a resukt of inevitable power cuts, says Platou Markets
• Chinese steel prices to fall 10% this summer, says Mirae
• Baosteel expects to win approval for Zhanjiang Project in Guangdong this year
• FT’s Lex Column on steel and China: warns of possible contraction
SHIPPING
• Vale to spend $2.9 billion to set up Brazil’s largest port
• Capesize rents gain for a fifth day following speculation that vessels have been withdrawn
At the other extreme was the FT’s Lex Column. It said that as long as China “continues its recent pace of development, its share of global steel demand will probably stay at around the current 45% (by comparison, it consumes only 10% of the World’s oil). In that case, the growth rate of global steel production could well stay at the 5% it has registered for the last decade. “The construction of Chinese infrastructure has lifted the global intensity of steel use to levels not seen since the post-War reconstruction of Europe and Japan ended in the early 1970s. That golden period was followed by two decades of minimal growth in global steel production – and dismal profits. “When China is built out, its steel demand should fall. Chinese producers, left with spare capacity, would then be tempted to export into an already well supplied world. That implies another bad decade or two for the industry”. For the record, the FT says that the World currently consumes nearly 0.034 kilogrammes of steel per unit of global GDP. This compares with nearly 0.036 in 1960 but as low as 0.022 in 1990. Food for thought.
Somewhere in between these two, is the inevitability of power cuts which will cause a fall in Chinese steel production. For example, Deutsche Bank says the shortage may reach 35 gigawatts or 3.7% of the Country’s capacity last year; and 35 gigawatts is enough to supply 35 million US households. In turn, this means that production has risen in the first four months of the year by 9.1%; and in the month of April China accounted for 47% of World steel output. As a result, Steel Market Intelligence says inventories are rising.
Of more concern is Mirae Securities view that China steel prices will fall 10% this summer. Similarly, spot iron ore prices have fallen 5.9% in three weeks to $173 at Tianjin; and this despite contract iron ore prices for Vale and Rio in Q3 expected to be little changed (i.e. as much as down 1.2% for Rio).
Back to the ‘highs’, though, Baosteel is doing its bit by finally winning planning permission for a new 10 million metric ton mill in Zhanjiang in Guangdong. As a result, too, some 15 million tons of obsolete capacity will be shut down. Baosteel also, enigmatically said it will seek to consolidate steelmakers in Guangdong; albeit no details are, as yet, forthcoming.
Finally Vale is not bearish (and nor am I) as it invests $2.9 billion to increase the capacity of the Ponta da Madeira terminal in northern Brazil, making it the largest port in the Country by volume. Similarly, Exxaro Resources, a South African coal miner, has made a rare bid ($129 million) in iron ore, with the target being the Aussie miner Territory Resources. This is part of Exxaro seeking to meet its goal of producing 10 million metric tons of iron ore a year. And, finally, Glencore continues to seek further off-take deals in iron ore and may well extend its agreement with London Mining in Sierra Leone.
“For every low there is an equal but opposite high” - Norman Cousins
HEADLINES
IRON ORE
• Vale will hold contract iron ore prices, while Rio dips, says Platts
• Iron ore prices fall 5.9% in three weeks to $173
• London Mining in talks with Glencore on iron sales
• Exxaro offers $130 million cash for Australian iron ore producer, Territory Resources
STEEL
• Steel inventories in China may be rising, says researcher Steel Market Intelligence
• China’s steel production rises 9.1% in first four months
• China’s steel output may fall from June as a resukt of inevitable power cuts, says Platou Markets
• Chinese steel prices to fall 10% this summer, says Mirae
• Baosteel expects to win approval for Zhanjiang Project in Guangdong this year
• FT’s Lex Column on steel and China: warns of possible contraction
SHIPPING
• Vale to spend $2.9 billion to set up Brazil’s largest port
• Capesize rents gain for a fifth day following speculation that vessels have been withdrawn
Monday 23 May 2011
Tick, tock
“You Americans, you always look at your watches. We look at our calendar” said, a Chinese education minister to the Carnegie Corporation of New York. I am of neither nationality, but I side with the education minister, especially when both the Shanghai and Hong Kong stock exchanges fell by more than 2% today; and in HK it seems worse given that the points fall was almost 500. Both domestic indicies are now negative in 2011, too.
No prizes for guessing why – as all eyes are on Europe’s sovereign debt issues. Similarly, S&P has said Italy’s credit rating is at risk (the outlook has slipped from stable to negative), while Fitch has cut Greece’s to B+, four steps below investment grade (down from BB+).
“The biggest concern about Europe is the risk of contagion and of credit markets drying up globally” said Platypus Asset Management. “The memory of the global financial crisis is fresh in everyone’s mind, and everybody’s preference is that we don’t go there again. Greece has a disproportionately large ability to cause a lot of collateral damage. Credit is a very important mechanism for quickly transmitting malaise around the world. If Europe’s problems affect credit markets generally it has the ability to derail the global economic recovery”.
Meantime, in China activity is moderating but there will be no hard landing. So says HSBC/Markit as its ‘flash’ PMI for manufacturing eased from 51.8 to 51.1 (the actual one is out on eight days time). Overall, too, the Index suggests that factory output is growing at 13% per annum and GDP at 9%; which is all very nice to be getting on with. The World Bank concurs with its higher forecast for China’s GDP of 9.3% this year (up from 9.0% in March and 8.7% last November); albeit this compares with 10.3% last year. The Bank describes this as “healthy” but it is worried about inflation and urges the Chinese authorities not to ease tightening just yet. The money markets agree and the seven day repo rate has risen for the third day (+62 basis points) to 4.7%. This is despite the general view, that while inflation will continue to rise this quarter (perhaps to as high as 6%), it will moderate in the second half of the year.
Meantime, the Yuan has been perky but lacks international maturity (and will continue to) i.e. after hitting a new high of 6.4948 to the US dollar on 11 May, it dipped 15 basis points this morning to 6.4998.
I don’t think that China wants to raise interest rates again or see a dramatic rise in the value of its currencies. Of course, it will increase rates if needs must, even temporarily; but the currency is a different story. Note, too, that the World Bank has underlined the fact that exports as a share of GDP fell to 29% last year, which compares with 39% in 2006. The economy is changing. In the same vein, Nomura says Chinese stocks will trade in a “range” until the middle of the year amid concerns over inflation and slowing economic growth. But it remains “optimistic” on the market for the full year, saying the economy will likely enter a “soft landing”.
“Oh! Do not attack me with your watch. A watch is always too fast or too slow. I cannot be dictated to by a watch” - Jane Austen
SHANGHAI COMPOSITE
Today: -2.93% to 2,774.57 at close
Last week: -0.44%
March: -0.8%
April: -0.6%
May (to date): -4.7%
YTD: -1.2%
Since 05/07/10: +17.4%
Since 08/11/10: -12.2%
HANG SENG:
Today: -2.11% to 22,711.02 at close
Last week: -0.33%
March: +0.8%
April: +0.8%
May (to date): -4.2%
YTD: -1.4%
Since 25/05/10 +19.6%
Since 08/11/10: -9.0%
OIL FUTURES: $97.26
GOLD FUTURES: $1509.11
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.3996
ECONOMY
• China’s growth in manufacturing hits 10 month – but there will be no “hard landing”, according to ‘flash’ PMI from HSBC/Markit
• World Bank raises China’s 2011 GDP forecast from 9.0 to 9.3% and urges more tightening
• Global economy to expand just over 4% this year, says Barclays and Morgan Stanley; down from 4.9% in 2010
• China is unlikely to allow a “jump” in the Yuan’s value, says NERI’s Fan Gang; and inflation will ease in H2
CASH
• Money market rate rises for third day as Companies conserve cash
• Yuan dips after record 6.4948 on 11 May
• China wants its banks to maintain leverage ratio of at least 4%
• Offshore Yuan trading tops $1 billion a day for the first time
• PBOC injects a net Yuan 67 billion into banks via money market
REAL ESTATE
• Stale bear Andy Xie claims that Chinese real estate prices will drop by 50% in three years
ELECTRICITY
• China’s power capacity to rise 77% by 2020, says State Grid
COMPANIES
• Anhui Conch is raising cash at just over 5%
• A majority of Chinese flooring companies face preliminary US duties of as much as 83%
PEOPLE
• Artist Ai Weiwei has evaded “a huge amount” of taxes, says Chinese police
HONG KONG
• HKMA may seek to slow down the growth in Yuan deposits, which is at a record
• City’s banks may moderate credit growth
COMMODITIES
• China is now largest market for gold bar and coins; although India remains largest consumer overall
• Iron ore prices steady as buyers wait
• Iron ore prices may fall on Chinese power shortages, says Deutsche
• China’s daily crude steel output up 0.29% in first 10 days of May
• Glencore is unperturbed about the slide in commodity prices
• Glencore buys iron ore in Brazil
• Chinese shipbuilder examines plans to build the World’s largest commodity carrier
• Quality issues raised with Indian iron ore
• Iron ore “bubble” looms, says Baosteel
No prizes for guessing why – as all eyes are on Europe’s sovereign debt issues. Similarly, S&P has said Italy’s credit rating is at risk (the outlook has slipped from stable to negative), while Fitch has cut Greece’s to B+, four steps below investment grade (down from BB+).
“The biggest concern about Europe is the risk of contagion and of credit markets drying up globally” said Platypus Asset Management. “The memory of the global financial crisis is fresh in everyone’s mind, and everybody’s preference is that we don’t go there again. Greece has a disproportionately large ability to cause a lot of collateral damage. Credit is a very important mechanism for quickly transmitting malaise around the world. If Europe’s problems affect credit markets generally it has the ability to derail the global economic recovery”.
Meantime, in China activity is moderating but there will be no hard landing. So says HSBC/Markit as its ‘flash’ PMI for manufacturing eased from 51.8 to 51.1 (the actual one is out on eight days time). Overall, too, the Index suggests that factory output is growing at 13% per annum and GDP at 9%; which is all very nice to be getting on with. The World Bank concurs with its higher forecast for China’s GDP of 9.3% this year (up from 9.0% in March and 8.7% last November); albeit this compares with 10.3% last year. The Bank describes this as “healthy” but it is worried about inflation and urges the Chinese authorities not to ease tightening just yet. The money markets agree and the seven day repo rate has risen for the third day (+62 basis points) to 4.7%. This is despite the general view, that while inflation will continue to rise this quarter (perhaps to as high as 6%), it will moderate in the second half of the year.
Meantime, the Yuan has been perky but lacks international maturity (and will continue to) i.e. after hitting a new high of 6.4948 to the US dollar on 11 May, it dipped 15 basis points this morning to 6.4998.
I don’t think that China wants to raise interest rates again or see a dramatic rise in the value of its currencies. Of course, it will increase rates if needs must, even temporarily; but the currency is a different story. Note, too, that the World Bank has underlined the fact that exports as a share of GDP fell to 29% last year, which compares with 39% in 2006. The economy is changing. In the same vein, Nomura says Chinese stocks will trade in a “range” until the middle of the year amid concerns over inflation and slowing economic growth. But it remains “optimistic” on the market for the full year, saying the economy will likely enter a “soft landing”.
“Oh! Do not attack me with your watch. A watch is always too fast or too slow. I cannot be dictated to by a watch” - Jane Austen
SHANGHAI COMPOSITE
Today: -2.93% to 2,774.57 at close
Last week: -0.44%
March: -0.8%
April: -0.6%
May (to date): -4.7%
YTD: -1.2%
Since 05/07/10: +17.4%
Since 08/11/10: -12.2%
HANG SENG:
Today: -2.11% to 22,711.02 at close
Last week: -0.33%
March: +0.8%
April: +0.8%
May (to date): -4.2%
YTD: -1.4%
Since 25/05/10 +19.6%
Since 08/11/10: -9.0%
OIL FUTURES: $97.26
GOLD FUTURES: $1509.11
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.3996
ECONOMY
• China’s growth in manufacturing hits 10 month – but there will be no “hard landing”, according to ‘flash’ PMI from HSBC/Markit
• World Bank raises China’s 2011 GDP forecast from 9.0 to 9.3% and urges more tightening
• Global economy to expand just over 4% this year, says Barclays and Morgan Stanley; down from 4.9% in 2010
• China is unlikely to allow a “jump” in the Yuan’s value, says NERI’s Fan Gang; and inflation will ease in H2
CASH
• Money market rate rises for third day as Companies conserve cash
• Yuan dips after record 6.4948 on 11 May
• China wants its banks to maintain leverage ratio of at least 4%
• Offshore Yuan trading tops $1 billion a day for the first time
• PBOC injects a net Yuan 67 billion into banks via money market
REAL ESTATE
• Stale bear Andy Xie claims that Chinese real estate prices will drop by 50% in three years
ELECTRICITY
• China’s power capacity to rise 77% by 2020, says State Grid
COMPANIES
• Anhui Conch is raising cash at just over 5%
• A majority of Chinese flooring companies face preliminary US duties of as much as 83%
PEOPLE
• Artist Ai Weiwei has evaded “a huge amount” of taxes, says Chinese police
HONG KONG
• HKMA may seek to slow down the growth in Yuan deposits, which is at a record
• City’s banks may moderate credit growth
COMMODITIES
• China is now largest market for gold bar and coins; although India remains largest consumer overall
• Iron ore prices steady as buyers wait
• Iron ore prices may fall on Chinese power shortages, says Deutsche
• China’s daily crude steel output up 0.29% in first 10 days of May
• Glencore is unperturbed about the slide in commodity prices
• Glencore buys iron ore in Brazil
• Chinese shipbuilder examines plans to build the World’s largest commodity carrier
• Quality issues raised with Indian iron ore
• Iron ore “bubble” looms, says Baosteel
Friday 20 May 2011
Iron ore boom or bust
TW COMMENT: it has been a week of mostly positive news flow for iron ore (Japanese demand, a 2011 supply shortfall, firm prices and a forecast 12% rise in China’s steel production this year). Plus, we have seen the spectacular debut on public markets of commodities trader Glencore (market cap. $59 billion). It is thus interesting that Baosteel’s Chairman has chosen now to make bearish comments on the future performance of the iron ore sector; and there could well be a ‘political’ element at work here? Similarly, Macquarie’s forecasts for what might happen to prices in 2014 (i.e. broadly halving) are just that - forecasts; particularly as it is also predicting a 36% rise in seaborne irOn ore volumes by 2016.
BAOSTEEL CHAIRMAN IS CAUTIOUS
The iron ore market has risen to “bubble” levels which will burst as new mines create oversupply of the steelmaking raw material, according to China’s second largest steek maker Baosteel Group. “There is a bubble in this market, many are gambling”, making acquisitions and investment expensive said Chairman Xu Lejiang in an interview in Shanghai, without saying when prices would drop. “Everyone who has money is rushing in to invest in iron ore”.
Vale, Rio Tinto and BHP Billiton, the three biggest suppliers, plan to spend $45 billion on mines. “The reason the big three keep spending is that they probably think growth in India, Brazil, Russia and South Africa will be sustained, and also because they believe the return on their input would beat those blind investments” by smaller rivals, continued Xu. The biggest losers from the new mines may be the speculative companies which have not yet started production and their investors, he added. “Some investors are simply making money by trading the iron ore projects before seeing actual output. Iron ore prices will definitely fall at some point because the supply demand situation will have a turnaround”.
Demand from steelmakers in China has spurred an almost threefold jump in the cash price for 62% iron ore delivered to Tianjin since 21 November 2008 (when data became available) according to the Steel Index. It was $175.30 per ton on 19 May. Producers valuations have also soared and the Bloomberg Global Iron Ore Mining Index of 30 iron ore companies have surged four fold since 2008. “In Australia, South Africa and America, I’ve seen a lot of investors whom only ‘dig’ iron ore on the stock market, they will never see physical output” from their mines, said Xu. The average profit margin of Chinese steelmakers was 3.5% in the 2010, the lowest of any industry, because of overcapacity and rising raw material costs, according to the Chinese Government. This is about a tenth of the margins the largest iron ore miners make, added Xu.
Macquarie Group (18 May) says iron ore may trade between $150 and $190 a ton for the next three years before declining to a long-term average of $80 a ton after 2014 as demand growth in China slows. However, global seaborne supply may increase to 1.48 billion tons by 2016, from a forecast 1.09 billion tons this year.
BHP will spend $6.6 billion expanding output in Western Australia to more than 220 million metric tons a year. Meantime Rio Tinto is spending $14.8 billion to boost output by 50% to 333 million metric tons and Vale plans to invest $24 billion this year alone on expansions.
Iron ore supply may outstrip demand “sooner than expected,” as production increases after record prices spurred investment in mines, in Xu’s view (earlier he had orecast the market to move into surplus in 2014).
China has been encouraging State-owned steelmakers to invest in overseas resources to cut their dependence on the three miners. Baosteel is “very interested” in participating in Rio Tinto and Aluminium Corporation of China’s Simandou iron ore project in Guinea, said Xu. Similarly, Wuhan Iron & Steel has invested in eight projects in Canada, Brazil, Australia, Liberia and Madagascar.
BAOSTEEL CHAIRMAN IS CAUTIOUS
The iron ore market has risen to “bubble” levels which will burst as new mines create oversupply of the steelmaking raw material, according to China’s second largest steek maker Baosteel Group. “There is a bubble in this market, many are gambling”, making acquisitions and investment expensive said Chairman Xu Lejiang in an interview in Shanghai, without saying when prices would drop. “Everyone who has money is rushing in to invest in iron ore”.
Vale, Rio Tinto and BHP Billiton, the three biggest suppliers, plan to spend $45 billion on mines. “The reason the big three keep spending is that they probably think growth in India, Brazil, Russia and South Africa will be sustained, and also because they believe the return on their input would beat those blind investments” by smaller rivals, continued Xu. The biggest losers from the new mines may be the speculative companies which have not yet started production and their investors, he added. “Some investors are simply making money by trading the iron ore projects before seeing actual output. Iron ore prices will definitely fall at some point because the supply demand situation will have a turnaround”.
Demand from steelmakers in China has spurred an almost threefold jump in the cash price for 62% iron ore delivered to Tianjin since 21 November 2008 (when data became available) according to the Steel Index. It was $175.30 per ton on 19 May. Producers valuations have also soared and the Bloomberg Global Iron Ore Mining Index of 30 iron ore companies have surged four fold since 2008. “In Australia, South Africa and America, I’ve seen a lot of investors whom only ‘dig’ iron ore on the stock market, they will never see physical output” from their mines, said Xu. The average profit margin of Chinese steelmakers was 3.5% in the 2010, the lowest of any industry, because of overcapacity and rising raw material costs, according to the Chinese Government. This is about a tenth of the margins the largest iron ore miners make, added Xu.
Macquarie Group (18 May) says iron ore may trade between $150 and $190 a ton for the next three years before declining to a long-term average of $80 a ton after 2014 as demand growth in China slows. However, global seaborne supply may increase to 1.48 billion tons by 2016, from a forecast 1.09 billion tons this year.
BHP will spend $6.6 billion expanding output in Western Australia to more than 220 million metric tons a year. Meantime Rio Tinto is spending $14.8 billion to boost output by 50% to 333 million metric tons and Vale plans to invest $24 billion this year alone on expansions.
Iron ore supply may outstrip demand “sooner than expected,” as production increases after record prices spurred investment in mines, in Xu’s view (earlier he had orecast the market to move into surplus in 2014).
China has been encouraging State-owned steelmakers to invest in overseas resources to cut their dependence on the three miners. Baosteel is “very interested” in participating in Rio Tinto and Aluminium Corporation of China’s Simandou iron ore project in Guinea, said Xu. Similarly, Wuhan Iron & Steel has invested in eight projects in Canada, Brazil, Australia, Liberia and Madagascar.
Wednesday 18 May 2011
Exploding watermelons
An agrarian minefield has been discovered in Jiangsu Province in eastern China where nearly all the watermelons on a 700 mu site (around 115 acres) have burst open. This was caused, apparently, by a chemical known as forchlorfenuron which is designed to prompt plant growth, but clearly over-did it.
The Chinese authorities have been doing the opposite in the housing market where they have used legislative weed-killer to constrain growth in prices. And, depending upon which commentator you talk to, the crop protection is either working or it isn’t. This is compounded by the fact that the Government has re-cast the calculation of data and where efficacy is questioned.
My view is that the Government has been successful in slowing down the rate of house price inflation, which was its intention i.e. it never wanted germination to cease. But it is a correction not a collapse, given underlying demand and wealth
For example, in April, new homes in nine cities out of 70 recorded a dip in price, while five were flat compared to March. All increases in price, too, were smaller than 1% on a month-on-month basis and 26 cities had smaller rises than March. Year-on-year, three cities had a decline in prices (versus two in March), while 52 witnessed a slowing rate of gain. For the second-hand market, 16 cities recorded an easing in prices, with 13 flat compared to March. Three more cities showed month-on-month declines. On a year-on-year basis, eight cities saw a drop (versus three in March), while 45 slowed. Similarly, sales by floor space in April fell 9.9% from a year earlier, the first drop since September. Overall, too, house prices increased at a faster pace in smaller cities and slowed in major ones, with the exception of southern manufacturing hubs. Month on month for example, new home prices in Beijing rose by just 0.1% while in Guangzhou the rise was +0.7% for the month.
In the money markets there has been a similar result for the central authorities. After the fifth increase in banks’ reserve ratio requirement or RRRs, the seven day repurchase rate declined the most in almost three months this morning (by 138 basis points to 3.21%) on speculation a cash squeeze will ease as banks comply.
Foreign direct investment or FDI in China is also alive and well and in April it rose 15% to $8.5 billion, after a 33% gain in March; and, for the first four months, the total was $38.8 billion, a gain of 26%. Foreign companies are targeting consumers in China as earnings rise and families move to cities from rural areas. China is aiming to increase urban and rural per capita net income by more than 7% a year in real terms over the next five years, according to the National Development and Reform Commission (March 2011). Similarly, Premier Wen aims to shift economic growth to a model which is driven by consumption and is less reliant on exports. “Global investors are still attracted by China’s growth story” said Societe Generale. “The question is what the Chinese Government is going to do about the capital inflows which are putting pressure on the Yuan”. Note, too, that last month, work began on the $4.4 billion Shanghai Disney Resort.
In fact investment spending in emerging markets - overall - is set to outpace expenditure in developed economies for the first time ever in 2011 as a surge in infrastructure supports global growth, according to Citigroup. In turn, this forms part of global fixed investment which will reach $23.2 trillion by 2016, an increase of 61% from last year. Herein, urbanisation in particular is prompting developing countries, including China and India, to spend on roads, power stations and water systems; and putting this in context, McKinsey brilliantly quantifies that China will need to add residential and commercial floor space equivalent to building New York City every two years, to keep pace with population growth. The Nation will also lengthen its rail network to 120,000 kilometres (75,000 miles) from 86,000 by 2015; and its roads will surpass those in the US within five years, from 70% of the size today. Similarly, the Country’s urbanisation ratio is rising towards the level of developed nations, to 63% longer term from 47% now. Going the other way, too, China will also invest more than $1 trillion abroad by 2020, according to the Asia Society and Woodrow Wilson Center for International Scholars.
As a result of this investment, demand for copper, steel and other commodities may very well “provide a floor” beneath raw material prices, according to Principal Global Investors. In addition - and based on one of my favourite adages: ‘it is a thin wind that dries nobody’s washing’ - estimates for spending in Japan in the wake of March’s tragic earthquake and tsunami are of the order of $300 billion, of which some 10% will be spent on steel products, says ANZ. As it rebuilds, Japan’s consumption of steel may climb 8% annually in the next three to five years – and at least half would be imported. “Benchmark that against virtually flat growth in the last 10 years in Japanese steel production and we are talking an additional 10 million tons of steel each year” continues ANZ. In the same vein, Government forecasts say China’s crude steel output may rise 12% this year to 700 million metric tons – up from an earlier estimate of 660 million tons. What is more global seaborne supply of iron ore will fall about 15 million tons short of demand this year, compared with an 11 million ton surplus in 2010, according to Macquarie. It, thus, predicts that Chinese spot prices will probably jump by more than 15% this year. So much for a commodities bust.
“China will need to add residential and commercial floor space equivalent to building New York City every two years, to keep pace with population growth” – McKinsey
SHANGHAI COMPOSITE:
Today: +0.70% to 2,872.77 at close
This week: +0.06%
March: -0.8%
April: -0.6%
May (to date): -1.3%
YTD: +2.3%
Since 5 July 2010: +21.5%
Since 8 Nov. 2010: -9.1%
HANG SENG:
Today: +0.48% to 23,011.14 at close
this week: +0.14%
March: +0.8%
April: +0.8%
May (to date): -3.0%
YTD: -0.3%
Since 25 May 2010: +21.2%
Since 8 Nov. 2010: -7.8%
OIL FUTURES: $98.09
GOLD FUTURES: $1491.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4251
ECONOMY
• Foreign Direct Investment in China climbs 15%
• Limits on electricity usage may reduce Q2 GDP growth by 0.5%, says Shanghai Securities News
• Chinese tourists set new daily record in Hong Kong at 122,893 on the 30th of April
REAL ESTATE
• House prices rise in April as commentators debate their strength
• Value of home sales fell 21% in April, while volume eased 9.9%
• The calculation of house price data has changed (so be careful)
• Reuters bullish on house prices; estimates 4.3% annual gain in April
• Soufun says house prices in April rose 0.4%
• Land sales fall at four major cities
• Insurance companies to be allowed to invest in affordable housing
• China stops developers financing through real estate trusts
• Evergrande Real Estate shares climb in Hong Kong trading on annoucement of Grandday Stake sale
• MGM plans 30 hotels in China to tap growing luxury travel demand
MONEY
• China money market rate drops on new reserve ratio requirement
• China cuts US Treasury holdings as Democrats and Republicans argue on national debt limits
MARKETS
• Investment in emerging markets is set to exceed that in the developed world for the first time
IRON & STEEL
• Tragic Japanese boost for iron ore and Chinese steel exports
• 15 million ton of global iron supply this year
• China steel output to rise by better than expected 12% this year
• Cheaper dry cargo shipping by 67%
The Chinese authorities have been doing the opposite in the housing market where they have used legislative weed-killer to constrain growth in prices. And, depending upon which commentator you talk to, the crop protection is either working or it isn’t. This is compounded by the fact that the Government has re-cast the calculation of data and where efficacy is questioned.
My view is that the Government has been successful in slowing down the rate of house price inflation, which was its intention i.e. it never wanted germination to cease. But it is a correction not a collapse, given underlying demand and wealth
For example, in April, new homes in nine cities out of 70 recorded a dip in price, while five were flat compared to March. All increases in price, too, were smaller than 1% on a month-on-month basis and 26 cities had smaller rises than March. Year-on-year, three cities had a decline in prices (versus two in March), while 52 witnessed a slowing rate of gain. For the second-hand market, 16 cities recorded an easing in prices, with 13 flat compared to March. Three more cities showed month-on-month declines. On a year-on-year basis, eight cities saw a drop (versus three in March), while 45 slowed. Similarly, sales by floor space in April fell 9.9% from a year earlier, the first drop since September. Overall, too, house prices increased at a faster pace in smaller cities and slowed in major ones, with the exception of southern manufacturing hubs. Month on month for example, new home prices in Beijing rose by just 0.1% while in Guangzhou the rise was +0.7% for the month.
In the money markets there has been a similar result for the central authorities. After the fifth increase in banks’ reserve ratio requirement or RRRs, the seven day repurchase rate declined the most in almost three months this morning (by 138 basis points to 3.21%) on speculation a cash squeeze will ease as banks comply.
Foreign direct investment or FDI in China is also alive and well and in April it rose 15% to $8.5 billion, after a 33% gain in March; and, for the first four months, the total was $38.8 billion, a gain of 26%. Foreign companies are targeting consumers in China as earnings rise and families move to cities from rural areas. China is aiming to increase urban and rural per capita net income by more than 7% a year in real terms over the next five years, according to the National Development and Reform Commission (March 2011). Similarly, Premier Wen aims to shift economic growth to a model which is driven by consumption and is less reliant on exports. “Global investors are still attracted by China’s growth story” said Societe Generale. “The question is what the Chinese Government is going to do about the capital inflows which are putting pressure on the Yuan”. Note, too, that last month, work began on the $4.4 billion Shanghai Disney Resort.
In fact investment spending in emerging markets - overall - is set to outpace expenditure in developed economies for the first time ever in 2011 as a surge in infrastructure supports global growth, according to Citigroup. In turn, this forms part of global fixed investment which will reach $23.2 trillion by 2016, an increase of 61% from last year. Herein, urbanisation in particular is prompting developing countries, including China and India, to spend on roads, power stations and water systems; and putting this in context, McKinsey brilliantly quantifies that China will need to add residential and commercial floor space equivalent to building New York City every two years, to keep pace with population growth. The Nation will also lengthen its rail network to 120,000 kilometres (75,000 miles) from 86,000 by 2015; and its roads will surpass those in the US within five years, from 70% of the size today. Similarly, the Country’s urbanisation ratio is rising towards the level of developed nations, to 63% longer term from 47% now. Going the other way, too, China will also invest more than $1 trillion abroad by 2020, according to the Asia Society and Woodrow Wilson Center for International Scholars.
As a result of this investment, demand for copper, steel and other commodities may very well “provide a floor” beneath raw material prices, according to Principal Global Investors. In addition - and based on one of my favourite adages: ‘it is a thin wind that dries nobody’s washing’ - estimates for spending in Japan in the wake of March’s tragic earthquake and tsunami are of the order of $300 billion, of which some 10% will be spent on steel products, says ANZ. As it rebuilds, Japan’s consumption of steel may climb 8% annually in the next three to five years – and at least half would be imported. “Benchmark that against virtually flat growth in the last 10 years in Japanese steel production and we are talking an additional 10 million tons of steel each year” continues ANZ. In the same vein, Government forecasts say China’s crude steel output may rise 12% this year to 700 million metric tons – up from an earlier estimate of 660 million tons. What is more global seaborne supply of iron ore will fall about 15 million tons short of demand this year, compared with an 11 million ton surplus in 2010, according to Macquarie. It, thus, predicts that Chinese spot prices will probably jump by more than 15% this year. So much for a commodities bust.
“China will need to add residential and commercial floor space equivalent to building New York City every two years, to keep pace with population growth” – McKinsey
SHANGHAI COMPOSITE:
Today: +0.70% to 2,872.77 at close
This week: +0.06%
March: -0.8%
April: -0.6%
May (to date): -1.3%
YTD: +2.3%
Since 5 July 2010: +21.5%
Since 8 Nov. 2010: -9.1%
HANG SENG:
Today: +0.48% to 23,011.14 at close
this week: +0.14%
March: +0.8%
April: +0.8%
May (to date): -3.0%
YTD: -0.3%
Since 25 May 2010: +21.2%
Since 8 Nov. 2010: -7.8%
OIL FUTURES: $98.09
GOLD FUTURES: $1491.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4251
ECONOMY
• Foreign Direct Investment in China climbs 15%
• Limits on electricity usage may reduce Q2 GDP growth by 0.5%, says Shanghai Securities News
• Chinese tourists set new daily record in Hong Kong at 122,893 on the 30th of April
REAL ESTATE
• House prices rise in April as commentators debate their strength
• Value of home sales fell 21% in April, while volume eased 9.9%
• The calculation of house price data has changed (so be careful)
• Reuters bullish on house prices; estimates 4.3% annual gain in April
• Soufun says house prices in April rose 0.4%
• Land sales fall at four major cities
• Insurance companies to be allowed to invest in affordable housing
• China stops developers financing through real estate trusts
• Evergrande Real Estate shares climb in Hong Kong trading on annoucement of Grandday Stake sale
• MGM plans 30 hotels in China to tap growing luxury travel demand
MONEY
• China money market rate drops on new reserve ratio requirement
• China cuts US Treasury holdings as Democrats and Republicans argue on national debt limits
MARKETS
• Investment in emerging markets is set to exceed that in the developed world for the first time
IRON & STEEL
• Tragic Japanese boost for iron ore and Chinese steel exports
• 15 million ton of global iron supply this year
• China steel output to rise by better than expected 12% this year
• Cheaper dry cargo shipping by 67%
Monday 16 May 2011
Back on line
The Chinese say that “it is better to do a good deed near home than to go far away and burn incense”; and I have been far away – some 20,000 kilometres from London in fact. Thank you, too, for all those cards and letters (as the late, great Dean Martin used to say).
During my blog-interregnum, I was first in China and then marketing in Australia – before some ‘down time’ in the nation of my birth New Zealand (aka Godzone); not to mention, brief sojourns in two City states (Hong Kong and Singapore). For the record, the number one issue in all locations was the cost of living. Concern about the housing market is also omnipresent and the prevailing political climes continue to morph to centre/right.
What I love about China, though, is the energy and industriousness of its people and there is a palpable vitality on the street. Nor does it take long to appreciate that there is a wonderful education system at work. It is, too, a truly vast country and increasingly the big boy on the global block. Okay, there is some local difficulty with inflation right now (in April it was 5.4%) and the stock market has fallen 200 points or so since mid-April. (Ai Weiwei and 99 other liberals also remain under spurious arrest).
But the very wise Jim O’Neil, Chairman of Goldman Sachs Asset Management says that his strongest hunch is that China’s inflation may be close to easing, meaning the Chinese stock market may go crazy in the second half. Similarly, the Government will stop tightening policies as price gains moderate. “China’s economy is probably slowing down more than people realise” said O’Neill, who coined the acronym BRIC for the economies of Brazil, Russia, India and China. This means that GDP may slow to about 8% annualised in June through December after 9.7% in Q1. The PBOC has raised interest rates four times since mid-October and, in 2011, has increased bank reserve requirements five times to rein in credit growth. The latest of these (+0.5%) kicks in on Wednesday at which point the large banks will be on 21% and this alone extracts Yuan 370 billion ($57 billion) of lending capacity.
Elsewhere the New York based Conference Board Leading Economic Index for China increased 1.0% in March to 157.0 (2004 = 100), following a 0.3% increase in both February and January. Four of the six components contributed positively to the index in March. “After two months of small increases, the large increase for China in March points to continued economic expansion in 2011. Combined with an up-tick in the coincident economic index (+1.6% to 199.6), the leading indicators suggest that risks of a hard landing for China’s economy in 2011 may be easing. However, growth will likely remain slower than during the second half of 2010. In March, improving consumer expectations and construction activity offset slack in the manufacturing supply chain and declining export orders”.
Real estate
Turning to real estate, it is hard to believe when travelling in China - outside of Beijing and Shanghai - that there is a property bubble. Furthermore, property development investment rose 34.3% in the four months January through April to Yuan 1.33 trillion. Similarly, by volume, China’s newly started property rose 24.4% to 249 million square metres in the first four months of the year. Okay, the value of home sales in the month of April declined 21% as Government measures impacted, but it was still 11% ahead in the first four months of the year: January through April. Similarly, house prices rose 0.4% in April for the eighth consecutive month. Finally, new home construction climbed 21% in the first four months to 440.1 million square metres (although in Beijing sales volume fell 32% to 2.6 million square metres).
More broadly, however, there are concerns that the Chinese Government’s plan to massively increase the supply of social housing will negatively impact developers’ margins. It is committed to building 36 million new homes in the social housing sector over the next five years; and about 10 million of those homes are planned for this year and next, almost twice the 5.8 million target for 2010. However, in my view, the public and private sectors should be able to work together here. For example, the Government can not physically do all the work on its own; and 36 million houses will only house 80 million people from a population of 1.3 billion.
Commodities
Turning to the vexed issue of natural resources, there has been a serious wobble in both price and expectation. The former, of course, can benefit China although in April imports of iron ore fell 11% - from March - to 52.9 million metric tons; they were also 4.4% lower year-on-year. However, import prices at Tianjin Port rose 5.3% in April. Similarly, in the week to 3 May, the price of iron ore with 62% iron content delivered to the Tianjin rose 2.1% to $182.60 per metric ton, the highest level since 14 April.
In terms of the domestic steel industry there are a number of issues, not least profitability in the face of soaring iron ore prices and coal. For example, the price of imported iron ore to China rose 54.4% in Q1. Electricity shortages are also now prevalent once more and the Government aims to cut some 26 million tons of outdated steel production capacity this year.
Taking all this on board, the China Iron & Steel Association says growth in Chinese demand for steel may ease to a rate of between 2.6 and 4.6% annually through 2015 as the economy slows. That is GDP will grow at an average 7% a year through 2015 from 11.2% in the past five years. Growth in apparent steel consumption, which includes stockpiles, averaged 17% a year from 2006 to 2010.
My final point here would be to say that I am not a bear on natural resources. Okay, there had to be a correction on price (and there has been) but demand remains inexorable even with the US and Japan out to lunch. Similarly, the appetite to secure supply (especially of iron ore) remains huge, with Severstal and ArcelorMittall (to name but two) continuing to invest here. Look out, too, for the imminent - and staggering successful - $11 billion IPO for Glencore, one of the World’s largest commodity traders. In addition, there could well be a bonus on dry cargo shipping rates, too, as fleet capacity rises 16% this year while annual volumes of water-borne iron ore rise 7%.
“Travel is fatal to prejudice, bigotry, and narrow-mindedness” - Mark Twain
SHANGHAI COMPOSITE:
Today: -0.77% to 2,849.07 at close
Last week: +0.25%
March: -0.8%
April: -0.6%
May (to date): -2.1%
YTD: +1.5%
Since 5 July 2010: +20.5%
Since 8 Nov. 2010: -9.8%
HANG SENG:
Today: -1.36% to 22,960.63 at close
Last week: +0.51%
March: +0.8%
April: +0.8%
May (to date): -3.2%
YTD: -0.3%
Since 25 May 2010: +20.9%
Since 8 Nov. 2010: -8.0%
OIL FUTURES: $98.10
GOLD FUTURES: $1496.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4123
FORECASTS
• Goldman Sach’s O’Neill says China inflation won’t be a problem as growth cools
• Deutsche Bank’s Jun Ma says China is more cautious on raising interest rates
• China moves on reserve ratios again but interest rate rises may be more limited
• Conference Board indices point to continued economic expansion in China and no hard landing
REAL ESTATE
• Property development investment rises 34.3% in January through April to Yuan 1.33 trillion
• The volume of newly started property in the four months January through April rises by 24.4%
• The value of home sales in China in April declined 21% on Government measures, but it was still 11% ahead for first four months; house prices also rose 0.4% in April for the eighth consecutive month
• Beijing housing sales in January to April drops 32%
• China’s plan to build record numbers of cheap housing may squeeze developers’ profits, says RBS and others
MONEY
• China orders banks to set aside more cash
ECONOMY
• China inflation spreading beyond food suggests that Wen will persist with tightening
• China inflation of 5.3% in April
• Wang calls for China growth model shift amid trade surplus
• China has bigger than forecast surplus on record exports
INVESTMENT
• Poll says China Yuan to be convertible by 2016
• Investors are less optimistic about China; but it still ranks number three Worldwide
• Investors shifting to cash from commodities
BONDS
• Yuan-denominated bonds continue to be popular in HK
• China buys most Japanese bonds since 2005
INDUSTRY
• Nation may face and electricity shortage
• Car sales slow
HONG KONG
• Hong Kong economy expands a faster-than-forecast 7.2% in Q1
• Hong Kong land sales beats estimates
IRON & STEEL
(i) domestic
• Imports of iron ore fall 11% by volume in April from previous month and 4.4% from a year earlier; but prices rise 5.3%
• Iron ore prices at $182.60 per ton on 3 May and expected to hold
• Chinese power cuts may curb steel production
• China steel demand growth may ease to 4.6% as economy slows; as Q1 imported iron ore prices rise 54%
(ii) international
• Iron ore ship rentals fall the most in months due to oversupply of vessels – and are 86% lower than a year ago
• Sundance seeks additional Chinese partner for $4.7 billion African iron ore project
• Severstal agrees to buy access to Brazil’s iron ore licenses
• ArcelorMittal Q1 profit beats estimates; but it sees a seasonal slowdown
• ArcelorMittal South Africa plans to work its own mine
• Quebec plans $83 billion investment in north of province
• Vale posts record quarterly profit - and more than four fold increase - on higher iron ore production and prices
• CSN says profit rises 38% as mining sales offset steel drop
• Vale’s ‘sea monster’ sends shipping returns plummeting
During my blog-interregnum, I was first in China and then marketing in Australia – before some ‘down time’ in the nation of my birth New Zealand (aka Godzone); not to mention, brief sojourns in two City states (Hong Kong and Singapore). For the record, the number one issue in all locations was the cost of living. Concern about the housing market is also omnipresent and the prevailing political climes continue to morph to centre/right.
What I love about China, though, is the energy and industriousness of its people and there is a palpable vitality on the street. Nor does it take long to appreciate that there is a wonderful education system at work. It is, too, a truly vast country and increasingly the big boy on the global block. Okay, there is some local difficulty with inflation right now (in April it was 5.4%) and the stock market has fallen 200 points or so since mid-April. (Ai Weiwei and 99 other liberals also remain under spurious arrest).
But the very wise Jim O’Neil, Chairman of Goldman Sachs Asset Management says that his strongest hunch is that China’s inflation may be close to easing, meaning the Chinese stock market may go crazy in the second half. Similarly, the Government will stop tightening policies as price gains moderate. “China’s economy is probably slowing down more than people realise” said O’Neill, who coined the acronym BRIC for the economies of Brazil, Russia, India and China. This means that GDP may slow to about 8% annualised in June through December after 9.7% in Q1. The PBOC has raised interest rates four times since mid-October and, in 2011, has increased bank reserve requirements five times to rein in credit growth. The latest of these (+0.5%) kicks in on Wednesday at which point the large banks will be on 21% and this alone extracts Yuan 370 billion ($57 billion) of lending capacity.
Elsewhere the New York based Conference Board Leading Economic Index for China increased 1.0% in March to 157.0 (2004 = 100), following a 0.3% increase in both February and January. Four of the six components contributed positively to the index in March. “After two months of small increases, the large increase for China in March points to continued economic expansion in 2011. Combined with an up-tick in the coincident economic index (+1.6% to 199.6), the leading indicators suggest that risks of a hard landing for China’s economy in 2011 may be easing. However, growth will likely remain slower than during the second half of 2010. In March, improving consumer expectations and construction activity offset slack in the manufacturing supply chain and declining export orders”.
Real estate
Turning to real estate, it is hard to believe when travelling in China - outside of Beijing and Shanghai - that there is a property bubble. Furthermore, property development investment rose 34.3% in the four months January through April to Yuan 1.33 trillion. Similarly, by volume, China’s newly started property rose 24.4% to 249 million square metres in the first four months of the year. Okay, the value of home sales in the month of April declined 21% as Government measures impacted, but it was still 11% ahead in the first four months of the year: January through April. Similarly, house prices rose 0.4% in April for the eighth consecutive month. Finally, new home construction climbed 21% in the first four months to 440.1 million square metres (although in Beijing sales volume fell 32% to 2.6 million square metres).
More broadly, however, there are concerns that the Chinese Government’s plan to massively increase the supply of social housing will negatively impact developers’ margins. It is committed to building 36 million new homes in the social housing sector over the next five years; and about 10 million of those homes are planned for this year and next, almost twice the 5.8 million target for 2010. However, in my view, the public and private sectors should be able to work together here. For example, the Government can not physically do all the work on its own; and 36 million houses will only house 80 million people from a population of 1.3 billion.
Commodities
Turning to the vexed issue of natural resources, there has been a serious wobble in both price and expectation. The former, of course, can benefit China although in April imports of iron ore fell 11% - from March - to 52.9 million metric tons; they were also 4.4% lower year-on-year. However, import prices at Tianjin Port rose 5.3% in April. Similarly, in the week to 3 May, the price of iron ore with 62% iron content delivered to the Tianjin rose 2.1% to $182.60 per metric ton, the highest level since 14 April.
In terms of the domestic steel industry there are a number of issues, not least profitability in the face of soaring iron ore prices and coal. For example, the price of imported iron ore to China rose 54.4% in Q1. Electricity shortages are also now prevalent once more and the Government aims to cut some 26 million tons of outdated steel production capacity this year.
Taking all this on board, the China Iron & Steel Association says growth in Chinese demand for steel may ease to a rate of between 2.6 and 4.6% annually through 2015 as the economy slows. That is GDP will grow at an average 7% a year through 2015 from 11.2% in the past five years. Growth in apparent steel consumption, which includes stockpiles, averaged 17% a year from 2006 to 2010.
My final point here would be to say that I am not a bear on natural resources. Okay, there had to be a correction on price (and there has been) but demand remains inexorable even with the US and Japan out to lunch. Similarly, the appetite to secure supply (especially of iron ore) remains huge, with Severstal and ArcelorMittall (to name but two) continuing to invest here. Look out, too, for the imminent - and staggering successful - $11 billion IPO for Glencore, one of the World’s largest commodity traders. In addition, there could well be a bonus on dry cargo shipping rates, too, as fleet capacity rises 16% this year while annual volumes of water-borne iron ore rise 7%.
“Travel is fatal to prejudice, bigotry, and narrow-mindedness” - Mark Twain
SHANGHAI COMPOSITE:
Today: -0.77% to 2,849.07 at close
Last week: +0.25%
March: -0.8%
April: -0.6%
May (to date): -2.1%
YTD: +1.5%
Since 5 July 2010: +20.5%
Since 8 Nov. 2010: -9.8%
HANG SENG:
Today: -1.36% to 22,960.63 at close
Last week: +0.51%
March: +0.8%
April: +0.8%
May (to date): -3.2%
YTD: -0.3%
Since 25 May 2010: +20.9%
Since 8 Nov. 2010: -8.0%
OIL FUTURES: $98.10
GOLD FUTURES: $1496.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4123
FORECASTS
• Goldman Sach’s O’Neill says China inflation won’t be a problem as growth cools
• Deutsche Bank’s Jun Ma says China is more cautious on raising interest rates
• China moves on reserve ratios again but interest rate rises may be more limited
• Conference Board indices point to continued economic expansion in China and no hard landing
REAL ESTATE
• Property development investment rises 34.3% in January through April to Yuan 1.33 trillion
• The volume of newly started property in the four months January through April rises by 24.4%
• The value of home sales in China in April declined 21% on Government measures, but it was still 11% ahead for first four months; house prices also rose 0.4% in April for the eighth consecutive month
• Beijing housing sales in January to April drops 32%
• China’s plan to build record numbers of cheap housing may squeeze developers’ profits, says RBS and others
MONEY
• China orders banks to set aside more cash
ECONOMY
• China inflation spreading beyond food suggests that Wen will persist with tightening
• China inflation of 5.3% in April
• Wang calls for China growth model shift amid trade surplus
• China has bigger than forecast surplus on record exports
INVESTMENT
• Poll says China Yuan to be convertible by 2016
• Investors are less optimistic about China; but it still ranks number three Worldwide
• Investors shifting to cash from commodities
BONDS
• Yuan-denominated bonds continue to be popular in HK
• China buys most Japanese bonds since 2005
INDUSTRY
• Nation may face and electricity shortage
• Car sales slow
HONG KONG
• Hong Kong economy expands a faster-than-forecast 7.2% in Q1
• Hong Kong land sales beats estimates
IRON & STEEL
(i) domestic
• Imports of iron ore fall 11% by volume in April from previous month and 4.4% from a year earlier; but prices rise 5.3%
• Iron ore prices at $182.60 per ton on 3 May and expected to hold
• Chinese power cuts may curb steel production
• China steel demand growth may ease to 4.6% as economy slows; as Q1 imported iron ore prices rise 54%
(ii) international
• Iron ore ship rentals fall the most in months due to oversupply of vessels – and are 86% lower than a year ago
• Sundance seeks additional Chinese partner for $4.7 billion African iron ore project
• Severstal agrees to buy access to Brazil’s iron ore licenses
• ArcelorMittal Q1 profit beats estimates; but it sees a seasonal slowdown
• ArcelorMittal South Africa plans to work its own mine
• Quebec plans $83 billion investment in north of province
• Vale posts record quarterly profit - and more than four fold increase - on higher iron ore production and prices
• CSN says profit rises 38% as mining sales offset steel drop
• Vale’s ‘sea monster’ sends shipping returns plummeting
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