Focus is the touchstone in almost all life’s endeavours; but, like you, I am a little blurry around the edges today. Friday’s ghastly events in Norway have cast a long, grim shadow far and wide; darkened further because a truly wonderful Scandinavian innocence has been extinguished, perhaps forever. I feel guilty, too, that I have little compassion left for the more than 35 dead souls in China’s dreadful train accident, also on Friday. “We go on, though; we go on because we must”.
Back in the prosaic economic world, the sceptre of US national bankruptcy on 2 August remains omnipresent. Okay, we sort of know that this preposterous game of chicken (see James Dean’s ‘Rebel without a Cause’) will end and that the US will raise its borrowing limit; but it is woefully testing right now.
Why then has China increased its holdings of US Treasuries for the second month running? In May it bought $7.3 billion to take its tally to $1.16 trillion. What does it know that we don't?
More understandable has been the PBOC’s addition of the Yuan to the anti-inflation armoury. On Friday, it reached its highest level (6.4455) since 1993 when the Nation took the first step to currency deregulation. Similarly, a firm money market rate is serving to tighten liquidity and could well absolve a further reserve ratio requirement move. For example, at local lunchtime today the seven day repurchase or ‘repo’ rate was still at 5.2697% (albeit off a touch or two from Friday's 5.4070%).
Elsewhere, the IMF has taken its double-edged sword to China. On the one hand, it says that the economy remains on a “solid footing” with GDP growth of perhaps 9.6% this year and 9.5% in 2012. Similarly, inflation should slow to an average 3.3% next year compared with 4.7% in 2011. However, the main near-term risks are inflation (as above), the threat of a property bubble and bad loans after stimulus spending. The IMF also warns of risks in local government debt funding.
China should also let the Yuan gain in order to boost demand and global economic stability, continues the Fund, and concludes that the currency remains undervalued by 3 to 23% depending on methodology. Finally, the IMF advocates an economic rebalancing including a crucial (and one assumes dramatic) reduction in household and corporate savings rates. To be fair, none of this is terribly new; but I guess it carries weight because it is the IMF saying it – and doing so more emphatically than in days of yore.
Turning to the vexed issue of ‘is the economy slowing or not?’, a flash forecast (ahead of official date on 1 August), looks like China’s manufacturing is; and, in July, it may well have contracted for the first time in a year. This comes from HSBC/Markit’s preliminary PPI for July which is 48.9, down from a final 50.1 for June. Note, too, that anything below 50 represents contraction. So, seasonal issues aside, maybe this galvanises official policy; but, of course, the economy cannot be allowed to slow too slowly, which underlines the policy dilemma.
The above is supported by the National School of Development at Peking University, which says that Q3 GDP is likely to slow to 9.3% in Q3 from 9.5% in Q2 (albeit with inflation staying stubbornly high). In Q1, GDP growth was 9.7 %. That said, the Conference Board’s leading indicator climbed for a third straight month in May. The index rose 0.5% to a preliminary 155 which, in turn, underlines prospects over the coming six months. The leading index has successfully signalled turning points in China’s economic cycle if plotted back to 1986, says the Board.
More immediate is today’s 3% fall in the Shanghai Composite, which is the worst since 17 January (also -3.0%). The US crisis was undoubtedly a factor, but more palpable was Friday night’s train wreck. Understandably there has been a knee jerk reaction in the value of any business (or official) associated with railways. For example, CSR, the Nation’s largest train maker, tumbled 8.9% (to Yuan 6.04). Similarly, developers were sharply lower as prospects for new schemes along the expanding high speed rail network were immediately deemed less viable. This means that the property sub-index within the SHI was off 4.1% (at 3380.72)at the close; albeit above its worst for the day.
“Tragedy should be utilised as a source of strength. No matter what sort of difficulties, how painful experience is, if we lose our hope, that’s our real disaster” - Dalai Lama XIV
SHANGHAI COMPOSITE
Today: -2.96% to 2,688.75 at close
Last week: -1.75%
July: -2.7%
YTD: -4.2%
Year ago: +4.5%
HANG SENG:
Today: -0.67% to 22,293.40 at close
Last week: +2.60%
July: -0.5%
YTD: -3.2%
Year ago: +7.1%
OIL FUTURES: $99.28
GOLD FUTURES: $1618.30
(new ‘immediate delivery’, intra-day high of $1624.07 on 25 July 2011)
EURO/$ SPOT: 1.4394
Monday 25 July 2011
Sunday 24 July 2011
Iron & steel weekly: $1,624.07
Chrysopoeia is the transmutation of base metals into gold or silver and is more commonly know as alchemy. Okay, despite four millennia trying, no one has actually been successful; albeit with gold at more than $1,620 per ounce it feels like it.
But it would be errant to ignore base metals (despite them being less glamorous) and, in particular, iron ore which has doubled in price in three years. It is also a less fickle bed fellow and top consultants (and part-time sleep counsellors), MEPS International, agree. For example, they reckon that China’s iron ore demand will rise 8.5% this year (i.e. 2011) to 1.07 billion tons.
In turn, this comes after record global steel production in June: up an annualised 8% to 127.8 million tonnes (China also hit a new high in June). Yes, the rate of growth may ease in Q3, but Ernst & Young is on record as saying that global steel production is set to rise 7% in 2011 on the back of China and India. Taking this a step further, Kumba Iron Ore Limited (see below) says that Chinese steel production will grow by an annualised 8% in H2.
- Kumba
As you can imagine, Kumba, the World’s fourth largest supplier of seaborne iron ore (62.3% owned by a grateful Anglo American), is enjoying its days in the sun. Its H1 net profit rose 40% - mostly on price appreciation - to Rand 9.05 billion ($1.32 billion). Volumes were static at 22 million tons (which is good given the wet weather in South Africa) but, with international customer prices up 56%, H1 sales climbed 35% to Rand 24.1 billion. This also meant that net margins rose from their already astonishing level of 36.4 to 37.6%. The Company was also generous with shareholders, hiking its interim dividend by 61% (to Rand 13.50 per share) with cover edging down from 1.5 to 1.3x.
In addition, Kumba is looking to expand in West Africa with a notional target of 10 to 20 million tons of output by 2020. However, nearer term, the Company expects “modest downward pressure” on iron ore prices in H2, as crude steel production seasonally eases; its full year costs are also predicted to rise 25%.
- the big three + 1 are bulls on China
Nonetheless, Kumba is another one benefiting from demand in China, a view endorsed by number three iron ore supplier BHP Billiton, which has just reported record production for an 11th year, driven by sales to China (in Q4 volumes rose 14% to 35.2 million tonnes). World number one, Vale said the same thing earlier in July i.e. it sees no slowdown from Chinese customers as the Country seeks to build 36 million low income houses over the next five years. And, finally, second in line to the throne, Rio Tinto, reported last week that its iron ore volumes rose 12% in Q2.
- India
Elsewhere, there is ‘trouble at mill’ in India, the World’s third largest national source of iron ore exports. In a Reuters opinion poll, the conclusion is that volumes shipped internationally could fall by a fifth to 71.25 million tonnes in the year to March 2012. This is due principally to a number of export restrictions at a national and local level; tariffs and higher costs are also factors. Furthermore, the Federation of Indian Minerals Industries reckons the tally could go as low as 64 million tonnes.
- Freights costs
On the high seas, perhaps the largest-ever over supply of ships has led freight prices to their lowest level in 10 years – relative to the cost of iron ore. For example, an iron ore voyage from Brazil to China now costs 10% of the value of its cargo – compared with 64% in 2003, according to data from Fernley Consultants. They also say that shipping rates will not rise until at least 2013. For the record, the Baltic Exchange says that capesize charter rates per day are now $11,314 for a one-off trip, compared with $234,000 in June 2008.
- Valemax
Meantime, Vale’s new, huge valemax iron ore carrier has sailed to Italy rather than China. Apparently, this was due to draft restrictions at Dalian not having been sorted out and a request from a European customer who needed raw material. Really? For the record, the ‘Vale Brasil’ is 362 metres long, which is one-and-a-half times the length of London’s Tower Bridge. It is also the first of 19 such behemoths planned at a cost of $2.3 billion; and, it is reported that, Vale will control another 16 under long term contracts. Number two, the China-built and eponymous ‘Vale China’ will start work in a couple of months with the remainder expected by the end of 2013. Vale may also revive plans to build an iron ore distribution centre in China; and this could well be similar to its $1.37 billion maritime terminal nearing completion in Malaysia.
- Posco
There is also expansive news from the World’s third largest steelmaker, Posco, which reported a 23% increase in Q2 net profit to Won 1.37 trillion ($1.3 billion) as a recovery in demand allowed it to increase prices. Sales did even better with a gain of 58% to Won 17.05 trillion; which also means net margins eased from 10.3 to 8.0% (compare these returns with those of Kumba - above - which are around 38%). Posco raised the price of benchmark hot-rolled steel plates by about 18% in April, albeit this compares with the 25% more it paid for iron ore in the June quarter versus March (and some 47% extra for coking coal).
- Goldmans, Citi & ThyssenKrupp
Finally, Goldman Sachs, which began to trade iron ore swaps earlier this year, is now preparing to enter the physical iron ore market, it is reported; and, Citigroup is doing the same. The belief is that it can offer an even better service with a foot in both camps, so to speak. There could well be a better margin in it too, I reckon. In any event both will be pleased with ThyssenKrupp’s view that iron ore prices will fall in 2014 at the earliest. How do they know?
“Nothing gold can stay” - Robert Frost
But it would be errant to ignore base metals (despite them being less glamorous) and, in particular, iron ore which has doubled in price in three years. It is also a less fickle bed fellow and top consultants (and part-time sleep counsellors), MEPS International, agree. For example, they reckon that China’s iron ore demand will rise 8.5% this year (i.e. 2011) to 1.07 billion tons.
In turn, this comes after record global steel production in June: up an annualised 8% to 127.8 million tonnes (China also hit a new high in June). Yes, the rate of growth may ease in Q3, but Ernst & Young is on record as saying that global steel production is set to rise 7% in 2011 on the back of China and India. Taking this a step further, Kumba Iron Ore Limited (see below) says that Chinese steel production will grow by an annualised 8% in H2.
- Kumba
As you can imagine, Kumba, the World’s fourth largest supplier of seaborne iron ore (62.3% owned by a grateful Anglo American), is enjoying its days in the sun. Its H1 net profit rose 40% - mostly on price appreciation - to Rand 9.05 billion ($1.32 billion). Volumes were static at 22 million tons (which is good given the wet weather in South Africa) but, with international customer prices up 56%, H1 sales climbed 35% to Rand 24.1 billion. This also meant that net margins rose from their already astonishing level of 36.4 to 37.6%. The Company was also generous with shareholders, hiking its interim dividend by 61% (to Rand 13.50 per share) with cover edging down from 1.5 to 1.3x.
In addition, Kumba is looking to expand in West Africa with a notional target of 10 to 20 million tons of output by 2020. However, nearer term, the Company expects “modest downward pressure” on iron ore prices in H2, as crude steel production seasonally eases; its full year costs are also predicted to rise 25%.
- the big three + 1 are bulls on China
Nonetheless, Kumba is another one benefiting from demand in China, a view endorsed by number three iron ore supplier BHP Billiton, which has just reported record production for an 11th year, driven by sales to China (in Q4 volumes rose 14% to 35.2 million tonnes). World number one, Vale said the same thing earlier in July i.e. it sees no slowdown from Chinese customers as the Country seeks to build 36 million low income houses over the next five years. And, finally, second in line to the throne, Rio Tinto, reported last week that its iron ore volumes rose 12% in Q2.
- India
Elsewhere, there is ‘trouble at mill’ in India, the World’s third largest national source of iron ore exports. In a Reuters opinion poll, the conclusion is that volumes shipped internationally could fall by a fifth to 71.25 million tonnes in the year to March 2012. This is due principally to a number of export restrictions at a national and local level; tariffs and higher costs are also factors. Furthermore, the Federation of Indian Minerals Industries reckons the tally could go as low as 64 million tonnes.
- Freights costs
On the high seas, perhaps the largest-ever over supply of ships has led freight prices to their lowest level in 10 years – relative to the cost of iron ore. For example, an iron ore voyage from Brazil to China now costs 10% of the value of its cargo – compared with 64% in 2003, according to data from Fernley Consultants. They also say that shipping rates will not rise until at least 2013. For the record, the Baltic Exchange says that capesize charter rates per day are now $11,314 for a one-off trip, compared with $234,000 in June 2008.
- Valemax
Meantime, Vale’s new, huge valemax iron ore carrier has sailed to Italy rather than China. Apparently, this was due to draft restrictions at Dalian not having been sorted out and a request from a European customer who needed raw material. Really? For the record, the ‘Vale Brasil’ is 362 metres long, which is one-and-a-half times the length of London’s Tower Bridge. It is also the first of 19 such behemoths planned at a cost of $2.3 billion; and, it is reported that, Vale will control another 16 under long term contracts. Number two, the China-built and eponymous ‘Vale China’ will start work in a couple of months with the remainder expected by the end of 2013. Vale may also revive plans to build an iron ore distribution centre in China; and this could well be similar to its $1.37 billion maritime terminal nearing completion in Malaysia.
- Posco
There is also expansive news from the World’s third largest steelmaker, Posco, which reported a 23% increase in Q2 net profit to Won 1.37 trillion ($1.3 billion) as a recovery in demand allowed it to increase prices. Sales did even better with a gain of 58% to Won 17.05 trillion; which also means net margins eased from 10.3 to 8.0% (compare these returns with those of Kumba - above - which are around 38%). Posco raised the price of benchmark hot-rolled steel plates by about 18% in April, albeit this compares with the 25% more it paid for iron ore in the June quarter versus March (and some 47% extra for coking coal).
- Goldmans, Citi & ThyssenKrupp
Finally, Goldman Sachs, which began to trade iron ore swaps earlier this year, is now preparing to enter the physical iron ore market, it is reported; and, Citigroup is doing the same. The belief is that it can offer an even better service with a foot in both camps, so to speak. There could well be a better margin in it too, I reckon. In any event both will be pleased with ThyssenKrupp’s view that iron ore prices will fall in 2014 at the earliest. How do they know?
“Nothing gold can stay” - Robert Frost
Monday 18 July 2011
Real estate special (July No. 4): The Good, the Bad and the Soft
The good news is that new house prices continue to rise; the bad news is that new house prices continue to rise......
Tautology or not, it is, on the one hand, encouraging to see that house prices in China continue to rise (+4.1% in June year-on-year), which underlines the vibrancy of the economy. The risk is, though, that the Government will throw the baby out with the bathwater of (even more) property market restrictions.
Indeed, it should take the month-on-month temperature of the water (an increase of +0.1%) as a guide to it getting cooler. Raised interest rates and reserve ratio requirements, higher deposits levels (now 30% for first time buyers; and in some cases 40%) and, the most incisive, HPRs or house purchase restrictions are doing their job; and the latter are to be extended now to tier 2 and 3 cities. As JLL eloquently says, the Government wants stabilisation in prices, not to drive them down i.e. the primary intention is to flatten prices out and stop them rising faster than incomes. It is also stoking up the supply of affordable houses (36 million over the next five years).
Right now, the Government needs to be patient and I believe it will be. And just like the economy at large, this key sub-sector will land ‘at a sufficiently low velocity for the equipment or occupants to remain unharmed’.
“I don't believe in pessimism. If something doesn't come up the way you want, forge ahead. If you think it's going to rain, it will”
- Clint Eastwood
DETAIL
NEW HOME PRICES IN THE PRC, JUNE 2011 (% CHANGES):
Nationally: +4.1 year-on-year (+4.1 in May); and +0.1 in month (+0.2 in May)
Beijing: +2.2 yoy (+2.1); & +0.0 (+0.1)
Chongqing: +5.8 yoy (+5.2); & +0.0 (+0.2)
Guangzhou: +5.4 yoy (+5.1); & +0.2 (+0.3)
Shanghai: +2.2 yoy (+1.4); & +0.1 (+0.2)
Shenzen: +4.6 yoy (+3.7); & +0.1 (+0.4)
Tianjin: +3.9 yoy (+3.4); & -0.2 (-0.3)
New home prices rose in June by 4.1% and in 67 out of 70 Chinese cities, monitored by the National Bureau of Statistics; the same numbers as in May. It is also the case that in a majority of cities, June’s rate of annual increase exceeded that of March. On a month by month basis, though, the rate of increase nationally was just 0.1% which is down from +0.2% in May; and this is the sixth month in a row that the monthly rate has dipped against the previous one.
In Beijing and Shanghai the rate of annual increase in June was higher than May (albeit below the national average). This was especially true of Shanghai (2.2% versus 1.4%) which showed the largest points gain of the six selected cities above. Gains here also came despite Government constraints on the market.
Once more, on a monthly basis, too, it is a more stark picture – and here Shanghai slowed from +0.2 to +0.1%, while Beijing was flat in June against May’s +0.1% (meantime, existing home prices in Beijing were up by an annualised 1.4% in June from a year ago, while in Shanghai they increased by 2.4%).
Finally, in terms of extremes, Urumqi in Xinjiang Province posted the biggest gain in new house prices in June at 9.2% yoy in June, while Sanya on Hainan island experienced the biggest fall of 2% last month on a year ago.
As noted previous, the value of national residential sales in H1, rose 22% to Yuan 2.1 trillion; and in the month of June alone by 31% to Yuan 499.2 billion.
In JLL’s view, the price increases in Shanghai and Beijing are modest and reflect, in particular, the home purchase restrictions (HPRs) which have probably been the most strictly enforced here. These work on the basis that per household you cannot own more than two units in any of 36 cities. In turn, this means that at the top end of the market in Beijing, prices are beginning to come down.
However, the Government wants stabilisation in prices, not to drive them down, continued JLL i.e. the primary intention is to flatten prices out and stop them rising faster than incomes. It also said that most of the large developers are quite optimistic and that they are taking market share from smaller local developers. Nonetheless, inventories are rising. For example, housing starts rose 40% last year and, to date in 2011, sales are running at 22%. In the same vein, GF Securities said that unsold homes in 11 major cities reached 634,000 units as of 10 July, which will take 9.8 months to de-stock based on the current rate of sales.
ANZ took a slightly different tack. “China has negative interest rates right now with high inflation, so it’s not surprising that people are back to higher yielding assets, such as real estate”. However, it added, that any more home purchase restrictions will force developers to cut supplies and push up home prices again. “This will go against the Government’s will to control home prices”.
Credit Suisse added that “China is still largely a policy driven market. The Government is still confident it can manoeuvre it. We do see the market continue to weaken, but we’re not pricing in any hard landing”.
Finally, Cheung Kong Holdings, controlled by Hong Kong billionaire Li Ka-shing, also said that it was “proper and adequate” for China to cool down its real estate market. Rising home prices run the risk of becoming a social problem, said Executive Director, Justin Chiu, in Shanghai, where he showcased three new projects. “We do hope prices will remain stable, otherwise the Government will take more action. As a property developer, we don’t want prices to rise too quickly either and want prices to be stable”.
China will expand its efforts to control the growth in residential prices to smaller cities after limiting home purchases in Beijing and Shanghai, according to the State Council. It said that so-called second and third tier cities, which have seen excessive price gains, should restrict the number of homes each family is allowed to buy. It is also reported that commercial banks are restricting individual property loans.
For its part the State Council said “the property policies are at a critical moment. We must strictly uphold the direction of the curbs and won’t ease the tightening measures”. The Government will also seek to constrain residential rental growth and it has committed to building 36 million units of social or affordable housing over the next five years, with up to 10 million coming this year (although this 2011 target seems optimistic). Similarly, Premier Wen Jiabao said “we will unswervingly implement property tightening measures. We will continue curbing irrational housing demand, increase efforts to build affordable and modest homes”.
Tautology or not, it is, on the one hand, encouraging to see that house prices in China continue to rise (+4.1% in June year-on-year), which underlines the vibrancy of the economy. The risk is, though, that the Government will throw the baby out with the bathwater of (even more) property market restrictions.
Indeed, it should take the month-on-month temperature of the water (an increase of +0.1%) as a guide to it getting cooler. Raised interest rates and reserve ratio requirements, higher deposits levels (now 30% for first time buyers; and in some cases 40%) and, the most incisive, HPRs or house purchase restrictions are doing their job; and the latter are to be extended now to tier 2 and 3 cities. As JLL eloquently says, the Government wants stabilisation in prices, not to drive them down i.e. the primary intention is to flatten prices out and stop them rising faster than incomes. It is also stoking up the supply of affordable houses (36 million over the next five years).
Right now, the Government needs to be patient and I believe it will be. And just like the economy at large, this key sub-sector will land ‘at a sufficiently low velocity for the equipment or occupants to remain unharmed’.
“I don't believe in pessimism. If something doesn't come up the way you want, forge ahead. If you think it's going to rain, it will”
- Clint Eastwood
DETAIL
NEW HOME PRICES IN THE PRC, JUNE 2011 (% CHANGES):
Nationally: +4.1 year-on-year (+4.1 in May); and +0.1 in month (+0.2 in May)
Beijing: +2.2 yoy (+2.1); & +0.0 (+0.1)
Chongqing: +5.8 yoy (+5.2); & +0.0 (+0.2)
Guangzhou: +5.4 yoy (+5.1); & +0.2 (+0.3)
Shanghai: +2.2 yoy (+1.4); & +0.1 (+0.2)
Shenzen: +4.6 yoy (+3.7); & +0.1 (+0.4)
Tianjin: +3.9 yoy (+3.4); & -0.2 (-0.3)
New home prices rose in June by 4.1% and in 67 out of 70 Chinese cities, monitored by the National Bureau of Statistics; the same numbers as in May. It is also the case that in a majority of cities, June’s rate of annual increase exceeded that of March. On a month by month basis, though, the rate of increase nationally was just 0.1% which is down from +0.2% in May; and this is the sixth month in a row that the monthly rate has dipped against the previous one.
In Beijing and Shanghai the rate of annual increase in June was higher than May (albeit below the national average). This was especially true of Shanghai (2.2% versus 1.4%) which showed the largest points gain of the six selected cities above. Gains here also came despite Government constraints on the market.
Once more, on a monthly basis, too, it is a more stark picture – and here Shanghai slowed from +0.2 to +0.1%, while Beijing was flat in June against May’s +0.1% (meantime, existing home prices in Beijing were up by an annualised 1.4% in June from a year ago, while in Shanghai they increased by 2.4%).
Finally, in terms of extremes, Urumqi in Xinjiang Province posted the biggest gain in new house prices in June at 9.2% yoy in June, while Sanya on Hainan island experienced the biggest fall of 2% last month on a year ago.
As noted previous, the value of national residential sales in H1, rose 22% to Yuan 2.1 trillion; and in the month of June alone by 31% to Yuan 499.2 billion.
In JLL’s view, the price increases in Shanghai and Beijing are modest and reflect, in particular, the home purchase restrictions (HPRs) which have probably been the most strictly enforced here. These work on the basis that per household you cannot own more than two units in any of 36 cities. In turn, this means that at the top end of the market in Beijing, prices are beginning to come down.
However, the Government wants stabilisation in prices, not to drive them down, continued JLL i.e. the primary intention is to flatten prices out and stop them rising faster than incomes. It also said that most of the large developers are quite optimistic and that they are taking market share from smaller local developers. Nonetheless, inventories are rising. For example, housing starts rose 40% last year and, to date in 2011, sales are running at 22%. In the same vein, GF Securities said that unsold homes in 11 major cities reached 634,000 units as of 10 July, which will take 9.8 months to de-stock based on the current rate of sales.
ANZ took a slightly different tack. “China has negative interest rates right now with high inflation, so it’s not surprising that people are back to higher yielding assets, such as real estate”. However, it added, that any more home purchase restrictions will force developers to cut supplies and push up home prices again. “This will go against the Government’s will to control home prices”.
Credit Suisse added that “China is still largely a policy driven market. The Government is still confident it can manoeuvre it. We do see the market continue to weaken, but we’re not pricing in any hard landing”.
Finally, Cheung Kong Holdings, controlled by Hong Kong billionaire Li Ka-shing, also said that it was “proper and adequate” for China to cool down its real estate market. Rising home prices run the risk of becoming a social problem, said Executive Director, Justin Chiu, in Shanghai, where he showcased three new projects. “We do hope prices will remain stable, otherwise the Government will take more action. As a property developer, we don’t want prices to rise too quickly either and want prices to be stable”.
China will expand its efforts to control the growth in residential prices to smaller cities after limiting home purchases in Beijing and Shanghai, according to the State Council. It said that so-called second and third tier cities, which have seen excessive price gains, should restrict the number of homes each family is allowed to buy. It is also reported that commercial banks are restricting individual property loans.
For its part the State Council said “the property policies are at a critical moment. We must strictly uphold the direction of the curbs and won’t ease the tightening measures”. The Government will also seek to constrain residential rental growth and it has committed to building 36 million units of social or affordable housing over the next five years, with up to 10 million coming this year (although this 2011 target seems optimistic). Similarly, Premier Wen Jiabao said “we will unswervingly implement property tightening measures. We will continue curbing irrational housing demand, increase efforts to build affordable and modest homes”.
China iron & steel weekly: Stairway to Heaven
Okay, this missive is ostensibly about iron ore (and steel), but when considering things dug from the ground, how can I ignore the new record price of gold? And, indeed, after a bumper week, it passed another milestone today as the price for immediate delivery hit $1,600.10. “There's a lady who’s sure all that glitters is gold. And she’s buying the stairway to heaven” (J. Page & R. Plant).
Back in the more prosaic ferrous world, MF Global is in a bright mood with its view that the price of iron ore is likely to remain at “elevated levels” near $160 to 170 per ton for three to five years; and the latest benchmark price I have for China is $174.10 spot (+0.6% in the week).
The World’s number two iron ore producer, Rio Tinto, was also in ‘ebulliont’ mood at its Q2 announcement saying that the market was “characterised by continued strong prices”. Similarly, iron ore volumes rose 12%, year on year, to 48.9 million metric tons; albeit assisted by no repeat of the Australian floods. Rio also plans to expand its Australian iron ore operations 50% by 2015 at a cost of some $14.8 billion. This prompted a (lyrical) Liberum Capital to say that “iron ore production will continue to surge ahead for the next four years as Rio continues to execute flawless delivery in its ramp up to 333 million tons a year by the first half of 2015”. This is up from a forecast 240 million tons this year.
Polish was also added by the World Steel Association which is forecasting steel demand to grow 6% next year as requirements from China and India increase.
Also, in China June’s daily crude steel output shone with a new record of 1.998 million tonnes in June. This is up 2.8% from May which also took the month’s tally to 59.93 million tonnes. And, in terms of all steel products, China produced 78.73 million tonnes in June, up 14.8% from a year earlier. Custeel said “the construction of social housing units has accelerated in June, fuelling strong production of long steel products”. And, in July, it is forecasting volume gains for a number of products including wire rod output to rise almost 9%.
Apparently, too, China is producing 7% or so more steel than it lets on, according to consultant Meps. This amounts to some 40 million metric tons per annum – which Meps says is roughly the amount made by Germany. Principally, this is driven by the fact that a number of plants which should have been shut down (uneconomic and dirty) have kept producing to meet local demand; but no one owns up, officially. Meps goes on to say, too, this 'extra' steel production has created higher demand for iron ore, which is one of the factors keeping its price so high; which has also damaged steelmaker profitability and profit per se. For example, since January 2009, iron ore prices have more than doubled, in contrast to a 50% rise in benchmark steel prices. In turn, analysts expect Chinese steelmaker earnings to have fallen 36% in Q2.
Not helping this is Baosteel and Wuhan’s decisions to keep their main product prices mostly unchanged in August i.e. hot-rolled coil prices flat with some grades of cold-rolled up by Yuan 30 to 50 ($6.4 to 7.7) per tonne. This follows cuts by Baosteel in its main product prices by Yuan 100 to 200 in July. Interesting, too, is the decision by Taiwan’s top steel producer, China Steel, to reduce domestic steel product prices for September by an average of 1.69% from July/August; this is said to be due to slowing global economic growth and soft demand.
Elsewhere, Sichuan Hanlong Group has offered 50 cents per share or A$1.2 billion ($1.3 billion), in cash, for the 81.4% of Australia’s Sundance Resources that it does not own – with the aim of controlling the latter’s incipient iron ore project in West Africa. The offer is 25% higher than Sundance’s share price at the close of business on Friday 15 July; although the target has asked its shareholders to sit on their hands. According to Bloomberg, however, the offer is actually 47% more than Sundance’s weighted average share price over the past 20 trading days. What's more, this compares with the average premium of 26% for takeovers of iron ore companies worth more than $1 billion during the past five years. There has also been $6.9 billion worth of iron ore producer bids this year (excluding Sundance), which is the most since a golden 2008 when deals worth $8.4 billion were announced.
Also in Australia, Fortescue, Australia’s third largest iron ore miner saw June quarter volumes rise 6%. It is also looking to buy new delivery vessels for around $500 million and says that it is undertaking some business transactions in Yuan.
And, finally, in Brazil, MMX has agreed a 10 year iron ore supply deal for five million tonnes (per annum) from 2013 at $64 per ton. Brilliant. Plus, in Canada, Advanced Explorations says that initial drill results confirm iron ore mineralisation at its Tuktu project on the Melville Peninsula in Nunavut.
“When we have gold we are in fear, when we have none we are in danger” - English proverb
HEADLINES
• Iron ore prices to remain at “elevated levels” near $160 to 170 for three to five years, says MF Global
• Global steel demand to rise 6% next year, says WSA
• Rio Tinto’s iron ore production recovers with Q2 gain of 12%
• June’s steel production in China rises 14.8% to a new record level
• Consultant says China is under-reporting its steel output by some 7% per annum
• Chinese steelmakers see Q2 earnings down 36%
• Baosteel and Wuhan to keep August hot rolled coil prices unchanged
• Taiwan’s China Steel cuts prices by an average 1.7% for September
• Rio Tinto’s iron ore production recovers with Q2 gain of 12%
• Sichuan China bids for balance (81.4%) of Sundance Resources which it does not already own; prime attraction is the target’s African iron ore project
• Fortescue Metals Group: (i) business transactions in Yuan; (ii) June quarter iron ore shipments rise 6% with new facility; and (ii) discussing $480 million ship order
• MMX shares rises on Brazilian iron ore deal.
• Advanced Explorations receives good news on its Tuktu project on the Melville Peninsula in Nunavut, Canada
Back in the more prosaic ferrous world, MF Global is in a bright mood with its view that the price of iron ore is likely to remain at “elevated levels” near $160 to 170 per ton for three to five years; and the latest benchmark price I have for China is $174.10 spot (+0.6% in the week).
The World’s number two iron ore producer, Rio Tinto, was also in ‘ebulliont’ mood at its Q2 announcement saying that the market was “characterised by continued strong prices”. Similarly, iron ore volumes rose 12%, year on year, to 48.9 million metric tons; albeit assisted by no repeat of the Australian floods. Rio also plans to expand its Australian iron ore operations 50% by 2015 at a cost of some $14.8 billion. This prompted a (lyrical) Liberum Capital to say that “iron ore production will continue to surge ahead for the next four years as Rio continues to execute flawless delivery in its ramp up to 333 million tons a year by the first half of 2015”. This is up from a forecast 240 million tons this year.
Polish was also added by the World Steel Association which is forecasting steel demand to grow 6% next year as requirements from China and India increase.
Also, in China June’s daily crude steel output shone with a new record of 1.998 million tonnes in June. This is up 2.8% from May which also took the month’s tally to 59.93 million tonnes. And, in terms of all steel products, China produced 78.73 million tonnes in June, up 14.8% from a year earlier. Custeel said “the construction of social housing units has accelerated in June, fuelling strong production of long steel products”. And, in July, it is forecasting volume gains for a number of products including wire rod output to rise almost 9%.
Apparently, too, China is producing 7% or so more steel than it lets on, according to consultant Meps. This amounts to some 40 million metric tons per annum – which Meps says is roughly the amount made by Germany. Principally, this is driven by the fact that a number of plants which should have been shut down (uneconomic and dirty) have kept producing to meet local demand; but no one owns up, officially. Meps goes on to say, too, this 'extra' steel production has created higher demand for iron ore, which is one of the factors keeping its price so high; which has also damaged steelmaker profitability and profit per se. For example, since January 2009, iron ore prices have more than doubled, in contrast to a 50% rise in benchmark steel prices. In turn, analysts expect Chinese steelmaker earnings to have fallen 36% in Q2.
Not helping this is Baosteel and Wuhan’s decisions to keep their main product prices mostly unchanged in August i.e. hot-rolled coil prices flat with some grades of cold-rolled up by Yuan 30 to 50 ($6.4 to 7.7) per tonne. This follows cuts by Baosteel in its main product prices by Yuan 100 to 200 in July. Interesting, too, is the decision by Taiwan’s top steel producer, China Steel, to reduce domestic steel product prices for September by an average of 1.69% from July/August; this is said to be due to slowing global economic growth and soft demand.
Elsewhere, Sichuan Hanlong Group has offered 50 cents per share or A$1.2 billion ($1.3 billion), in cash, for the 81.4% of Australia’s Sundance Resources that it does not own – with the aim of controlling the latter’s incipient iron ore project in West Africa. The offer is 25% higher than Sundance’s share price at the close of business on Friday 15 July; although the target has asked its shareholders to sit on their hands. According to Bloomberg, however, the offer is actually 47% more than Sundance’s weighted average share price over the past 20 trading days. What's more, this compares with the average premium of 26% for takeovers of iron ore companies worth more than $1 billion during the past five years. There has also been $6.9 billion worth of iron ore producer bids this year (excluding Sundance), which is the most since a golden 2008 when deals worth $8.4 billion were announced.
Also in Australia, Fortescue, Australia’s third largest iron ore miner saw June quarter volumes rise 6%. It is also looking to buy new delivery vessels for around $500 million and says that it is undertaking some business transactions in Yuan.
And, finally, in Brazil, MMX has agreed a 10 year iron ore supply deal for five million tonnes (per annum) from 2013 at $64 per ton. Brilliant. Plus, in Canada, Advanced Explorations says that initial drill results confirm iron ore mineralisation at its Tuktu project on the Melville Peninsula in Nunavut.
“When we have gold we are in fear, when we have none we are in danger” - English proverb
HEADLINES
• Iron ore prices to remain at “elevated levels” near $160 to 170 for three to five years, says MF Global
• Global steel demand to rise 6% next year, says WSA
• Rio Tinto’s iron ore production recovers with Q2 gain of 12%
• June’s steel production in China rises 14.8% to a new record level
• Consultant says China is under-reporting its steel output by some 7% per annum
• Chinese steelmakers see Q2 earnings down 36%
• Baosteel and Wuhan to keep August hot rolled coil prices unchanged
• Taiwan’s China Steel cuts prices by an average 1.7% for September
• Rio Tinto’s iron ore production recovers with Q2 gain of 12%
• Sichuan China bids for balance (81.4%) of Sundance Resources which it does not already own; prime attraction is the target’s African iron ore project
• Fortescue Metals Group: (i) business transactions in Yuan; (ii) June quarter iron ore shipments rise 6% with new facility; and (ii) discussing $480 million ship order
• MMX shares rises on Brazilian iron ore deal.
• Advanced Explorations receives good news on its Tuktu project on the Melville Peninsula in Nunavut, Canada
Wednesday 13 July 2011
Real estate special (July No. 3): quick, quick, slow (ish)
REAL ESTATE in H1 - JANUARY to JUNE:
• Total investment: Yuan 2.625 trillion ($405 billion) i.e.+32.9% year on year (+34.6% in May)
• Source of Funds: Yuan 4.1 trillion i.e. 21.6% (+18.5% in May) including: 27% increase in deposits; 8% fall in mortgages; and 75% increase in foreign investment
• Sales (by value): Yuan 2.5 trillion i.e. +24.1% (+18.1% in May)
• Sales (by volume): 444.2 million square metres i.e. +12.9% (+9.1% in May)
• Floor space newly started: 994 million m2 i.e. +23.6% yoy (+23.8% in May)
• Floor space under construction: 4.1 billion m2 i.e. +31.6% yoy (+32.4% in May)
• Property Outlook Index in June: 101.75 (103.2 in May)
- included in the above:
RESIDENTIAL in H1 – JANUARY to JUNE
• Total investment: Yuan 1.864 trillion i.e. +36%
• Sales (by value): Yuan 2.1 trillion i.e. +22.3%
• June alone sales (by value): Yuan 499.2 billion i.e. +31%
• Sales (by volume): 398.1 million m2 i.e. +12.1%
• Floor space newly started: 769 million m2 i.e. +20.7%
• Floor space under construction: 3.1 billion m2 i.e. +30.0% yoy
The first thing you notice is the sheer scale of the numbers; and for those raised on imperial measurement you have to multiple 1 square metre by 10.76 to see how much it is in square feet. As with all (damned) statistics right now from China there is succour for both the bulls and the bears. The latter seized on the easing of the rate of increase in total investment from 34.6% in the first five months of the year to 32.9% in the first half (to $405 billion); which they said reflects Government constraints on the Sector.
Of the seven metrics above, too, four showed an easier rate of growth in H1 versus the first five months, albeit none dramatically so; and the gains were still robust in extremis (see above).
On the positive side were Sources of Funds (+3.1 percentage points in H1 versus first five months), property sales by value (+6 pp) and property sales by volume (+3.8 pp). The three additional laggards were floor space newly started (down 0.2 pp) and floor space under construction (down 0.8pp). In addition, and the most significant, in my view, was the Property Outlook Index. It was at 101.75 in June versus 103.2 in May. This puts it back to last December’s level and compares with an average for the last nine published months of 102.9 (with the mean about the same).
No such worries in the residential sector, though, where sales by value soared 22% in the first half and by a staggering 31% in the month of June alone (apologies, too, that I can not find the comparative five months data for the residential sector on China's National Bureau of Statistics website).
Elsewhere, China Daily reported very positive trends in both prices and transactions (in more than two thirds of the 35 major cities for which it had data) in the early days of July (4 through 10). However, SouFun said that house prices eased in eight of the Country’s 10 biggest cities during the month of June, albeit that, nationally, prices rose 0.4% in the same month.
The strong growth in residential volumes is said to reflect developers being more flexible on price and location i.e. moving to smaller cities, outside of Tier 1. In the second half, too, the beginning of the Government’s push to provide the first 10 million affordable houses from its five year target of 36 million is expected to have a positive impact.
In other news, office vacancies in Beijing’s Grade A market fell to a two decade low at the end of Q2, according to JLL; with rents, unsurprisingly heading towards a record peak. The overall vacancy rate declined 2.6 percentage points, quarter on quarter, to 8.3 %. In addition, Savills said much the same with their Q2 vacancy rate of 5.9% for the same market (down 2 percentage points in the quarter). Similarly, it also said that rents increased 12.6% to Yuan 241 Yuan ($37.25) per square metre in Q2. And as David Hand, Head of Investment in China at JLL, said “we see no let-up in this trend for the foreseeable future, thus making Beijing a truly compelling investment market”.
Rational man, who you have met before, would say that there is an incipient slow down in China’s real estate market (and I agree); and his favourite statistic is the Property Outlook Index (like me). But like the economy, a soft landing beckons, particularly given the very robust trend in housing volumes and office vacancy rates such as those being experienced in Beijing.
“Dance like nobody is watching” - Anon
SHANGHAI COMPOSITE
Today: +1.48% to 2,795.48 at close
This week: -0.08%
June: +0.7%
Q2: -5.7%
YTD: -0.4%
Year ago: +14.1%
HANG SENG:
Today: +1.22% to 21,926.90 at close
This week: -3.52%
June: -6.4%
Q2: -4.8%
YTD: -4.8%
Year ago: +7.3%
OIL FUTURES: $96.87
GOLD FUTURES: $1573.60
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4044
• Total investment: Yuan 2.625 trillion ($405 billion) i.e.+32.9% year on year (+34.6% in May)
• Source of Funds: Yuan 4.1 trillion i.e. 21.6% (+18.5% in May) including: 27% increase in deposits; 8% fall in mortgages; and 75% increase in foreign investment
• Sales (by value): Yuan 2.5 trillion i.e. +24.1% (+18.1% in May)
• Sales (by volume): 444.2 million square metres i.e. +12.9% (+9.1% in May)
• Floor space newly started: 994 million m2 i.e. +23.6% yoy (+23.8% in May)
• Floor space under construction: 4.1 billion m2 i.e. +31.6% yoy (+32.4% in May)
• Property Outlook Index in June: 101.75 (103.2 in May)
- included in the above:
RESIDENTIAL in H1 – JANUARY to JUNE
• Total investment: Yuan 1.864 trillion i.e. +36%
• Sales (by value): Yuan 2.1 trillion i.e. +22.3%
• June alone sales (by value): Yuan 499.2 billion i.e. +31%
• Sales (by volume): 398.1 million m2 i.e. +12.1%
• Floor space newly started: 769 million m2 i.e. +20.7%
• Floor space under construction: 3.1 billion m2 i.e. +30.0% yoy
The first thing you notice is the sheer scale of the numbers; and for those raised on imperial measurement you have to multiple 1 square metre by 10.76 to see how much it is in square feet. As with all (damned) statistics right now from China there is succour for both the bulls and the bears. The latter seized on the easing of the rate of increase in total investment from 34.6% in the first five months of the year to 32.9% in the first half (to $405 billion); which they said reflects Government constraints on the Sector.
Of the seven metrics above, too, four showed an easier rate of growth in H1 versus the first five months, albeit none dramatically so; and the gains were still robust in extremis (see above).
On the positive side were Sources of Funds (+3.1 percentage points in H1 versus first five months), property sales by value (+6 pp) and property sales by volume (+3.8 pp). The three additional laggards were floor space newly started (down 0.2 pp) and floor space under construction (down 0.8pp). In addition, and the most significant, in my view, was the Property Outlook Index. It was at 101.75 in June versus 103.2 in May. This puts it back to last December’s level and compares with an average for the last nine published months of 102.9 (with the mean about the same).
No such worries in the residential sector, though, where sales by value soared 22% in the first half and by a staggering 31% in the month of June alone (apologies, too, that I can not find the comparative five months data for the residential sector on China's National Bureau of Statistics website).
Elsewhere, China Daily reported very positive trends in both prices and transactions (in more than two thirds of the 35 major cities for which it had data) in the early days of July (4 through 10). However, SouFun said that house prices eased in eight of the Country’s 10 biggest cities during the month of June, albeit that, nationally, prices rose 0.4% in the same month.
The strong growth in residential volumes is said to reflect developers being more flexible on price and location i.e. moving to smaller cities, outside of Tier 1. In the second half, too, the beginning of the Government’s push to provide the first 10 million affordable houses from its five year target of 36 million is expected to have a positive impact.
In other news, office vacancies in Beijing’s Grade A market fell to a two decade low at the end of Q2, according to JLL; with rents, unsurprisingly heading towards a record peak. The overall vacancy rate declined 2.6 percentage points, quarter on quarter, to 8.3 %. In addition, Savills said much the same with their Q2 vacancy rate of 5.9% for the same market (down 2 percentage points in the quarter). Similarly, it also said that rents increased 12.6% to Yuan 241 Yuan ($37.25) per square metre in Q2. And as David Hand, Head of Investment in China at JLL, said “we see no let-up in this trend for the foreseeable future, thus making Beijing a truly compelling investment market”.
Rational man, who you have met before, would say that there is an incipient slow down in China’s real estate market (and I agree); and his favourite statistic is the Property Outlook Index (like me). But like the economy, a soft landing beckons, particularly given the very robust trend in housing volumes and office vacancy rates such as those being experienced in Beijing.
“Dance like nobody is watching” - Anon
SHANGHAI COMPOSITE
Today: +1.48% to 2,795.48 at close
This week: -0.08%
June: +0.7%
Q2: -5.7%
YTD: -0.4%
Year ago: +14.1%
HANG SENG:
Today: +1.22% to 21,926.90 at close
This week: -3.52%
June: -6.4%
Q2: -4.8%
YTD: -4.8%
Year ago: +7.3%
OIL FUTURES: $96.87
GOLD FUTURES: $1573.60
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4044
Mister Softee
This is the worldwide trade mark of the US ice cream franchise founded in 1956; and who has not been cheered by the gleeful music which emanates (in E-flat major) from its delivery vans. He was welcomed into China, first, in 2007 and his presence was particularly appreciated today at the announcement of Q2’s GDP figures where the spectre of a hard landing melted.
Okay, this was less than expected with Q2 GDP growth of +9.5% against a consensus view hovering around +9.3 to 9.4%, but it was the slowest since Q3 2009. And, as IFS said “the data should also help to dispel the wilder fears of an economic collapse in China as a result of the anti-inflation fight”. Equally elegant was IHS’s serving of “a resilient slowdown”. Support, too, came from the PBOC’s Li Daokui, who sits on the central bank’s MPC. He said, on CCTV, that the inflation rate is likely to fall quickly in the second half thanks to earlier monetary tightening. His estimate for the full year is now around 4.8%. This is above the Government's official 4.0% target but much, much better than June’s 6.4%, which Li reckons may have marked the peak for the year.
Yet, a majority of the ‘intelligent’ money is still licking for another up-tick in interest rates; although both the hawks and doves read what they wanted into Premier Wen’s fourth verbal offering in nine days. “We must slow down inflation, but we must not allow big fluctuation in economic growth” he said. “We must reasonably use various monetary policy tools to make our policies more targeted”. Measures to discourage “unreasonable” housing demand were also mentioned, in passing.
The doves also flew to the better than expected industrial production, led by cement (+19.9%) and despite a flattish performance from the crude oil sub-sector (+1.6%). The same goes for retail sales which rose 17.7%. Note, too, that end-user consumption contributed 4.6 percentage points to the 9.6% GDP growth in the first half. In a circumspect World, this latter statistic should provide warm comfort.
Finally, fixed asset investment remained robust at 25.6% annualised growth in the period January through June, which is only a touch off the 25.8% for the first five months to May; although the real estate sub-sector eased back to 32.9% from 34.6% on the same basis (comment on this will arrive under separate cover; as will that on the SCI and HSI which are still open).
Life is like an ice-cream cone, you have to lick it one day at a time”
- Charles M. Schulz
GDP in Q2:
• +9.5% year on year (Q1 = +9.7%)
• consensus forecast +9.3 to 9.4%
• +2.2% quarter on quarter (Q1 = +2.1%)
Industrial output in June:
• 15.1 yoy (13.1% in May)
• consensus forecast +13.1%
• cement: +19.9% (+19.2% in May)
• crude steel: +11.9% (+7.8% in May)
Retail sales in June:
• +17.7% yoy (+16.9% in May)
• consensus forecasts +17.0%
Fixed assets investment in June:
• +25.6% yoy (+25.8% in May)
• consensus forecast +25.8
Real estate investment in June:
• +32.9% yoy (+34.6% in May)
Okay, this was less than expected with Q2 GDP growth of +9.5% against a consensus view hovering around +9.3 to 9.4%, but it was the slowest since Q3 2009. And, as IFS said “the data should also help to dispel the wilder fears of an economic collapse in China as a result of the anti-inflation fight”. Equally elegant was IHS’s serving of “a resilient slowdown”. Support, too, came from the PBOC’s Li Daokui, who sits on the central bank’s MPC. He said, on CCTV, that the inflation rate is likely to fall quickly in the second half thanks to earlier monetary tightening. His estimate for the full year is now around 4.8%. This is above the Government's official 4.0% target but much, much better than June’s 6.4%, which Li reckons may have marked the peak for the year.
Yet, a majority of the ‘intelligent’ money is still licking for another up-tick in interest rates; although both the hawks and doves read what they wanted into Premier Wen’s fourth verbal offering in nine days. “We must slow down inflation, but we must not allow big fluctuation in economic growth” he said. “We must reasonably use various monetary policy tools to make our policies more targeted”. Measures to discourage “unreasonable” housing demand were also mentioned, in passing.
The doves also flew to the better than expected industrial production, led by cement (+19.9%) and despite a flattish performance from the crude oil sub-sector (+1.6%). The same goes for retail sales which rose 17.7%. Note, too, that end-user consumption contributed 4.6 percentage points to the 9.6% GDP growth in the first half. In a circumspect World, this latter statistic should provide warm comfort.
Finally, fixed asset investment remained robust at 25.6% annualised growth in the period January through June, which is only a touch off the 25.8% for the first five months to May; although the real estate sub-sector eased back to 32.9% from 34.6% on the same basis (comment on this will arrive under separate cover; as will that on the SCI and HSI which are still open).
Life is like an ice-cream cone, you have to lick it one day at a time”
- Charles M. Schulz
GDP in Q2:
• +9.5% year on year (Q1 = +9.7%)
• consensus forecast +9.3 to 9.4%
• +2.2% quarter on quarter (Q1 = +2.1%)
Industrial output in June:
• 15.1 yoy (13.1% in May)
• consensus forecast +13.1%
• cement: +19.9% (+19.2% in May)
• crude steel: +11.9% (+7.8% in May)
Retail sales in June:
• +17.7% yoy (+16.9% in May)
• consensus forecasts +17.0%
Fixed assets investment in June:
• +25.6% yoy (+25.8% in May)
• consensus forecast +25.8
Real estate investment in June:
• +32.9% yoy (+34.6% in May)
Tuesday 12 July 2011
Blue, red, blue, red and red
Germany’s GDP is roughly the same as China’s foreign exchange reserves which rose to a new record level of $3.2 trillion at the end of June. This is great per se but could well add further inflationary pressures. Note, too, that - although the PBOC purchased 26% less foreign currencies in June (with $42.9 million) than May - it increased buying by 136% on a year ago.
In terms of the Chinese currency this is ‘running fast to stand still’ i.e. as the central bank hoovers up the capital flows into China with Yuan, it releases local cash into the system; which it then buys back - seeking equilibrium. Given the three year high for inflation in June (6.4%), not always successfully; and perhaps this is by choice in that growth has been more important than inflation, until rampant food prices spoiled the party.
Unsurprisingly then, June’s new lending was Yuan 633.9 billion; and, while this was in line with market expectations, it was also 14.9% up on May and 6.4% ahead of last autumn. In turn, total loans rose 16.9% on the month to Yuan 51.4 trillion (and by 19.8% on September last year). But here is one for the Jeremiahs, who to my knowledge, never look at bank deposits. In June, for example, China’s bank deposits rose by Yuan 1.9 trillion to reach Yuan 78.6 trillion (which is nearly a fifth better than last summer). Now, while I am not suggesting that (like a Company’s gearing calculation), one nets cash off debt – I am tempted. At the very least it puts the alarmist headlines about bank debt into context; and the same goes for, what I believe will be, a soft landing.
In other news, Moody’s has issued warnings about accounting and governance at a number of Chinese companies with almost all of them having Moody’s so-called red flags planted on their front lawns. The rating agency said it looked at 49 companies rated as junk, and some with investment grades, against 20 red flags included under five headings: weak corporate governance; risky business models; fast growing strategies; poor earnings quality; and concerns over auditing. All 49 junk rated firms raised at least three red flags, with several flying 10 or more. Moody’s concluded by saying that some 80% of companies it rates with predominately Chinese operations have junk ratings.
Unsurprisingly, the companies highlighted by Moody’s saw their share prices fall, with West China Cement off by a record 26.5% at one point (before closing down 14% at HK$2.43). The Company is reported to have changed its auditor twice. But everyone else joined in, too, and the Hang Seng was - staggeringly - down nearly 700 points or 3.1%. The Shanghai Composite fared better, albeit it was still down 1.7%. Nor is it a good week for equities in other climes as fears about European sovereign debt and, perhaps, a shortage of it in the US do the damage. China’s Q2 GDP number is out tomorrow.
“If you can keep you head when all about you are losing theirs and blaming it on you” - Rudyard Kipling
FOREIGN EXCHANGE
FX reserves: a record $3.2 trillion at the end of June
- in line with forecasts
- up 5% in Q2; and +33% on a year ago
FX purchases: $42.9 billion in June
- up 26% on May; +136% on a year ago
LENDING
New loans: Yuan 633.9 billion
- in line with forecasts
- up 14.9% on May; and +6.4% on September 2010
Total loans: Yuan 51.4 trillion
- in line with forecasts
- up 16.9% on May; and +19.8% on September 2010
DEPOSITS
New deposits: Yuan 1.91 trillion
- up 72.1% on May; and +979.7% on October 2010
Total deposits: Yuan 78.6 trillion
- up 17.6% on May; and +18.5% on July 2010
MONEY SUPPLY
M2: +15.9%
- slightly ahead of consensus forecast of +15.2%
- compares with +15.1% in May; and +19.2% in July last year
Seven day repurchase rate on 12 July: 4.87% down 45 basis points
SHANGHAI COMPOSITE
Today: -1.72% to 2,754.58 at close
This week: -1.54%
June: +0.7%
Q2: -5.7%
YTD: -1.9%
Year ago: +10.6%
HANG SENG:
Today: -3.01% to 21,663.20 at close
This week: -4.68%
June: -6.4%
Q2: -4.8%
YTD: -6.0%
Year ago: +5.8%
OIL FUTURES: $94.43
GOLD FUTURES: $1547.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.3950
In terms of the Chinese currency this is ‘running fast to stand still’ i.e. as the central bank hoovers up the capital flows into China with Yuan, it releases local cash into the system; which it then buys back - seeking equilibrium. Given the three year high for inflation in June (6.4%), not always successfully; and perhaps this is by choice in that growth has been more important than inflation, until rampant food prices spoiled the party.
Unsurprisingly then, June’s new lending was Yuan 633.9 billion; and, while this was in line with market expectations, it was also 14.9% up on May and 6.4% ahead of last autumn. In turn, total loans rose 16.9% on the month to Yuan 51.4 trillion (and by 19.8% on September last year). But here is one for the Jeremiahs, who to my knowledge, never look at bank deposits. In June, for example, China’s bank deposits rose by Yuan 1.9 trillion to reach Yuan 78.6 trillion (which is nearly a fifth better than last summer). Now, while I am not suggesting that (like a Company’s gearing calculation), one nets cash off debt – I am tempted. At the very least it puts the alarmist headlines about bank debt into context; and the same goes for, what I believe will be, a soft landing.
In other news, Moody’s has issued warnings about accounting and governance at a number of Chinese companies with almost all of them having Moody’s so-called red flags planted on their front lawns. The rating agency said it looked at 49 companies rated as junk, and some with investment grades, against 20 red flags included under five headings: weak corporate governance; risky business models; fast growing strategies; poor earnings quality; and concerns over auditing. All 49 junk rated firms raised at least three red flags, with several flying 10 or more. Moody’s concluded by saying that some 80% of companies it rates with predominately Chinese operations have junk ratings.
Unsurprisingly, the companies highlighted by Moody’s saw their share prices fall, with West China Cement off by a record 26.5% at one point (before closing down 14% at HK$2.43). The Company is reported to have changed its auditor twice. But everyone else joined in, too, and the Hang Seng was - staggeringly - down nearly 700 points or 3.1%. The Shanghai Composite fared better, albeit it was still down 1.7%. Nor is it a good week for equities in other climes as fears about European sovereign debt and, perhaps, a shortage of it in the US do the damage. China’s Q2 GDP number is out tomorrow.
“If you can keep you head when all about you are losing theirs and blaming it on you” - Rudyard Kipling
FOREIGN EXCHANGE
FX reserves: a record $3.2 trillion at the end of June
- in line with forecasts
- up 5% in Q2; and +33% on a year ago
FX purchases: $42.9 billion in June
- up 26% on May; +136% on a year ago
LENDING
New loans: Yuan 633.9 billion
- in line with forecasts
- up 14.9% on May; and +6.4% on September 2010
Total loans: Yuan 51.4 trillion
- in line with forecasts
- up 16.9% on May; and +19.8% on September 2010
DEPOSITS
New deposits: Yuan 1.91 trillion
- up 72.1% on May; and +979.7% on October 2010
Total deposits: Yuan 78.6 trillion
- up 17.6% on May; and +18.5% on July 2010
MONEY SUPPLY
M2: +15.9%
- slightly ahead of consensus forecast of +15.2%
- compares with +15.1% in May; and +19.2% in July last year
Seven day repurchase rate on 12 July: 4.87% down 45 basis points
SHANGHAI COMPOSITE
Today: -1.72% to 2,754.58 at close
This week: -1.54%
June: +0.7%
Q2: -5.7%
YTD: -1.9%
Year ago: +10.6%
HANG SENG:
Today: -3.01% to 21,663.20 at close
This week: -4.68%
June: -6.4%
Q2: -4.8%
YTD: -6.0%
Year ago: +5.8%
OIL FUTURES: $94.43
GOLD FUTURES: $1547.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.3950
Monday 11 July 2011
Hu is an insider?
When the Chinese authorities raised interest rates on Wednesday evening (25 basis points to 6.56%), it is clear now that they already knew that June’s inflation number was a gut-busting 6.4%; the latter was announced on Saturday morning, ostensibly as a means to prevented leaks. Good job.
Food was the principal issue here (+14%) and, more specifically pork, which added 1.4 percentage points to the Consumer Price Index; yes, without it, the number would been 5.0%. Much overlooked, too, was a Producer Price Index which showed a very significant 7.1% rise in June (in October last year it was 5.0%).
As expected, there was much collective huffing and puffing from President Hu, Premier Wen and PBOC Governor Zhou about their commitment to keeping inflation under control – and supporting growth. As best as I can judge, too, a narrow majority of commentators believes that we will have one more hike in interest rates this cycle and in calendar 2011 i.e. inflation is now a larger risk than slowing growth, they say. Note, however, that the seven day repurchase rate dipped 82 basis points today to 5.3225%.
In what was a busy weekend for Chinese statisticians, we also had June’s trade figures on Sunday and while these showed the highest surplus ($22.3 billion) for seven months, the rate of import growth did slow down. Note, too, that the trade surplus in the first six months of 2011 dropped 18% to $44.9 billion, which is the lowest in seven years.
For the record, exports climbed 17.9%, the least since December (after excluding seasonal adjustment) to a record $162 billion (in May the gain was 19.4%). Meantime, imports rose by 19.3% to $139.7 billion, the weakest since November 2009 (in May the gain was 28.4%). Month on month, the trend is even more revealing with June’s exports up 3.1%, but imports down 3.0% on the same basis.
The trade surplus, of course, adds to the amount of cash in the system and makes it more difficult to fight inflation; and the trick is, of course, to achieve the latter without killing off growth. Similarly, if as an average Chinese citizen you live on $11 a day, a 57% increase in the price of pork in a year is life-changing. Nor was revolution or social discontent acted out on full bellies.
Okay, the slow down in imports was taken as a positive indicator that the economy was slowing in a sensible manner towards a soft landing. More evidence is expected here, too, on Wednesday when the Q2 GDP numbers are promulgated. The smart money is on 9.3% down from 9.7% in Q1.
Some analysts also look to an appreciating Yuan to help reduce inflation; but this is a double edged sabre, insofar as it makes exports less competitive. In any event on Friday, Non-deliverable Yuan Forwards were indicating a gain of some 1.3% against the dollar in the next 12 months. The Yuan closed at 6.4650 per dollar in Shanghai on Friday; it hit 6.4599 on 4 July, the strongest level since partial currency deregulation in 1993.
There were further push/pulls from the National Bureau of Statistics which said that its business confidence index fell to 132.4 in the second quarter from 137.4 in Q1 (in Q4 2008 it was 94.6). However, the Business Climate Index rose from 133.8 in Q1 to 135.6 in Q2. China’s passenger car sales in June also rose 3.5% from a year earlier to 1.02 million units, according to China’s Passenger Car Association. And, the State Council is reported to have agreed to spend in excess of Yuan 1.5 trillion ($232 billion) on development of the Country’s aviation industry over the next five years. This will include 45 new airports bringing to total to 220.
The background noise of local authority lending also grew louder and the National Audit Office (NAO) today denied understating the debts of local governments. This follows Moody’s Investors Service saying that liabilities may be as much as a third more than the NAO’s estimate i.e. an extra Yuan 3.5 billion on top of the official Yuan 10.7 trillion or $1.65 trillion. These are staggering sums indeed – either taking them gross or net (so to speak); just as the Nation’s $3 billion of foreign exchange reserves are - and the legendary savings of the World’s most populous nation.
"The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics” - Thomas Sowell
SHANGHAI COMPOSITE
Today: +0.18% to 2,802.69 at close
Last week: +1.39%
June: +0.7%
Q2: -5.7%
YTD: -0.2%
Year ago: +13.4%
HANG SENG:
Today: -1.67% to 22,347.20 at close
Last week: +2.20%
June: -6.4%
Q2: -4.8%
YTD: -3.0%
Year ago: +9.7%
OIL FUTURES: $94.73
GOLD FUTURES: $1553.90
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4071
HEADLINES
INFLATION
• Inflation hits 6.4% in June and a three year high; with 1.4 percentage points accounted for by pork
• China must keep inflation under control and support growth, says PBOC Governor
• PBOC advisor expects inflation to ease
TRADE
• Trade surplus hits seven month high of $22.5 billion
• Imports rose 17.9% annualised in June, the lowest since November 2009; and dipped 3% month on month
• Exports rose by annualised 17.9% in June, the lowest since December; but were ahead 3.1% month on month
ECONOMY
• Q1 current account surplus falls 21% to $28.8 billion
• Wen and PBOC Governor Zhou speak of stability and prudence
• Slowing growth leaves Government with few options
• China Q2 business confidence index dips from Q1
• Passenger car sales rise by an annualised 3.5% in June
• China’s aviation to exceed $232 billion over the next five years; including 45 new airports
EQUITIES
• Inflation jump will not upset share price rally, say Shenyin & Wango plus Bank of America-Merrill Lynch
• China Communications Construction delays $3 billion IPO
• Singapore’s state investor, Temasek, says it is bullish on China even after it sells share in two banks
• Chinese stocks to rally on policy easing, says Deutsche’s Jun Ma
• JPMorgan cuts China & HK stock recommendation to underweight
CASH
• Money market rate falls 82 basis points to 5.3225%
• No bailout needed for local government debt, says CCB Chairman
• China to implement minimum leverage ratio on lenders from 2012
• China debt sale fails for third time in 2011 as Finance Ministry raises Yuan 11.8 billion from Yuan 15 billion target at 3.3%
• China’s seven year bond draws least demand (1.55x) in 10 months on cash crunch for Yuan 30 billion at 3.7%
• Central Government sells Yuan 200 billion of five year bonds on behalf of local authorities at 3.84%; first such offering in 2011
• Local Government Financing Vehicles (LGFV) have seen their bonds yield trade at least 30 basis points higher in recent weeks
• China says it is taking “effective” measures on local debt, says State Auditor
• National Audit Office denies understating debt of local governments after Moodys said that it was Yuan 3.5 trillion grater than the official Yuan 10.7 billion ($1.65 trillion): of which 63% will be paid by central government, with a further 22% guaranteed by it
• China to punish local officials for excessive debts: report
REAL ESTATE
• A number of banks are raising property down payments percentages in selected cities; 30 to 40% for first time buyers at CCB in Zhejiang and Guangzhou says Beijing News
INTERNATIONAL
• Cheung Kong offers $3.88 billion for the UK’s Northumbrian Water
• US Chairman of US Joint Chiefs of Staff, Admiral Mike Mullen visits China
• China criticises US over military exercises in South China Sea; and its level of defence spending at a time of economic travails
Food was the principal issue here (+14%) and, more specifically pork, which added 1.4 percentage points to the Consumer Price Index; yes, without it, the number would been 5.0%. Much overlooked, too, was a Producer Price Index which showed a very significant 7.1% rise in June (in October last year it was 5.0%).
As expected, there was much collective huffing and puffing from President Hu, Premier Wen and PBOC Governor Zhou about their commitment to keeping inflation under control – and supporting growth. As best as I can judge, too, a narrow majority of commentators believes that we will have one more hike in interest rates this cycle and in calendar 2011 i.e. inflation is now a larger risk than slowing growth, they say. Note, however, that the seven day repurchase rate dipped 82 basis points today to 5.3225%.
In what was a busy weekend for Chinese statisticians, we also had June’s trade figures on Sunday and while these showed the highest surplus ($22.3 billion) for seven months, the rate of import growth did slow down. Note, too, that the trade surplus in the first six months of 2011 dropped 18% to $44.9 billion, which is the lowest in seven years.
For the record, exports climbed 17.9%, the least since December (after excluding seasonal adjustment) to a record $162 billion (in May the gain was 19.4%). Meantime, imports rose by 19.3% to $139.7 billion, the weakest since November 2009 (in May the gain was 28.4%). Month on month, the trend is even more revealing with June’s exports up 3.1%, but imports down 3.0% on the same basis.
The trade surplus, of course, adds to the amount of cash in the system and makes it more difficult to fight inflation; and the trick is, of course, to achieve the latter without killing off growth. Similarly, if as an average Chinese citizen you live on $11 a day, a 57% increase in the price of pork in a year is life-changing. Nor was revolution or social discontent acted out on full bellies.
Okay, the slow down in imports was taken as a positive indicator that the economy was slowing in a sensible manner towards a soft landing. More evidence is expected here, too, on Wednesday when the Q2 GDP numbers are promulgated. The smart money is on 9.3% down from 9.7% in Q1.
Some analysts also look to an appreciating Yuan to help reduce inflation; but this is a double edged sabre, insofar as it makes exports less competitive. In any event on Friday, Non-deliverable Yuan Forwards were indicating a gain of some 1.3% against the dollar in the next 12 months. The Yuan closed at 6.4650 per dollar in Shanghai on Friday; it hit 6.4599 on 4 July, the strongest level since partial currency deregulation in 1993.
There were further push/pulls from the National Bureau of Statistics which said that its business confidence index fell to 132.4 in the second quarter from 137.4 in Q1 (in Q4 2008 it was 94.6). However, the Business Climate Index rose from 133.8 in Q1 to 135.6 in Q2. China’s passenger car sales in June also rose 3.5% from a year earlier to 1.02 million units, according to China’s Passenger Car Association. And, the State Council is reported to have agreed to spend in excess of Yuan 1.5 trillion ($232 billion) on development of the Country’s aviation industry over the next five years. This will include 45 new airports bringing to total to 220.
The background noise of local authority lending also grew louder and the National Audit Office (NAO) today denied understating the debts of local governments. This follows Moody’s Investors Service saying that liabilities may be as much as a third more than the NAO’s estimate i.e. an extra Yuan 3.5 billion on top of the official Yuan 10.7 trillion or $1.65 trillion. These are staggering sums indeed – either taking them gross or net (so to speak); just as the Nation’s $3 billion of foreign exchange reserves are - and the legendary savings of the World’s most populous nation.
"The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics” - Thomas Sowell
SHANGHAI COMPOSITE
Today: +0.18% to 2,802.69 at close
Last week: +1.39%
June: +0.7%
Q2: -5.7%
YTD: -0.2%
Year ago: +13.4%
HANG SENG:
Today: -1.67% to 22,347.20 at close
Last week: +2.20%
June: -6.4%
Q2: -4.8%
YTD: -3.0%
Year ago: +9.7%
OIL FUTURES: $94.73
GOLD FUTURES: $1553.90
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4071
HEADLINES
INFLATION
• Inflation hits 6.4% in June and a three year high; with 1.4 percentage points accounted for by pork
• China must keep inflation under control and support growth, says PBOC Governor
• PBOC advisor expects inflation to ease
TRADE
• Trade surplus hits seven month high of $22.5 billion
• Imports rose 17.9% annualised in June, the lowest since November 2009; and dipped 3% month on month
• Exports rose by annualised 17.9% in June, the lowest since December; but were ahead 3.1% month on month
ECONOMY
• Q1 current account surplus falls 21% to $28.8 billion
• Wen and PBOC Governor Zhou speak of stability and prudence
• Slowing growth leaves Government with few options
• China Q2 business confidence index dips from Q1
• Passenger car sales rise by an annualised 3.5% in June
• China’s aviation to exceed $232 billion over the next five years; including 45 new airports
EQUITIES
• Inflation jump will not upset share price rally, say Shenyin & Wango plus Bank of America-Merrill Lynch
• China Communications Construction delays $3 billion IPO
• Singapore’s state investor, Temasek, says it is bullish on China even after it sells share in two banks
• Chinese stocks to rally on policy easing, says Deutsche’s Jun Ma
• JPMorgan cuts China & HK stock recommendation to underweight
CASH
• Money market rate falls 82 basis points to 5.3225%
• No bailout needed for local government debt, says CCB Chairman
• China to implement minimum leverage ratio on lenders from 2012
• China debt sale fails for third time in 2011 as Finance Ministry raises Yuan 11.8 billion from Yuan 15 billion target at 3.3%
• China’s seven year bond draws least demand (1.55x) in 10 months on cash crunch for Yuan 30 billion at 3.7%
• Central Government sells Yuan 200 billion of five year bonds on behalf of local authorities at 3.84%; first such offering in 2011
• Local Government Financing Vehicles (LGFV) have seen their bonds yield trade at least 30 basis points higher in recent weeks
• China says it is taking “effective” measures on local debt, says State Auditor
• National Audit Office denies understating debt of local governments after Moodys said that it was Yuan 3.5 trillion grater than the official Yuan 10.7 billion ($1.65 trillion): of which 63% will be paid by central government, with a further 22% guaranteed by it
• China to punish local officials for excessive debts: report
REAL ESTATE
• A number of banks are raising property down payments percentages in selected cities; 30 to 40% for first time buyers at CCB in Zhejiang and Guangzhou says Beijing News
INTERNATIONAL
• Cheung Kong offers $3.88 billion for the UK’s Northumbrian Water
• US Chairman of US Joint Chiefs of Staff, Admiral Mike Mullen visits China
• China criticises US over military exercises in South China Sea; and its level of defence spending at a time of economic travails
Iron & steel special (July No. 2): “we aren’t feeling any contraction in demand”
Imports of iron ore to China remain robust, with an 8% gain in H1. Note, too, that domestic Chinese production of iron ore hit a new record in May (102.5 million tons). Prices also remain firm despite having drifted 11% from February’s record to an 8 July spot price of $171.20 (and still more than a fifth ahead on a year ago). Similarly, steel company inventories of iron ore remain low, albeit they are at near record levels on the quay side (93.17 million tonnes).
Life has not been easy for the steel producers in terms of profits and margins as they have been unable to pass on the full and mammoth increased cost of raw materials. And this was underlined today by Angang Steel which said net income for the six months ended 30 June may have fallen by some 92% from a year earlier. Nonetheless, its share price rose 1.1% in morning trade to HK$8.85.
Perhaps most significant in the last seven days, however, were the bullish comments on China from Vale’s CFO Guilherme Cavalcanti. He said that the World’s largest iron ore producer sees no slowdown in demand from China as the Country seeks to build 36 million low income houses in the next five years. “We aren’t feeling any contraction in demand for iron ore mainly because infrastructure building is still going on in there and also social housing. The urbanisation process in China is far from over, so we think that these will keep leading the demand for iron ore”.
Elsewhere, Kumba is enjoying its days in the sun with a new record share price clear of Rand 500. This came after the Group said net profit for the six months to 30 June would be as much as 42% higher than the previous year - due to higher export iron ore prices. Kumba, 63.5% owned by Anglo American, is Africa’s largest exporter of iron ore and number four Worldwide.
In other news, Australia’s most unpopular Prime Minister since 1998, Julia Gillard, has announced her Country’s first tax on greenhouse gas emissions from July 2012. She is asking polluters to pay an initial charge of A$23 ($24.74) per ton of carbon dioxide (thereafter rising by the CPI plus 2.5% per annum). This compares with allowances of an average Euro 15.42 (A$20.45) per ton over the past year in Europe. Australia is the largest per-capita polluter in the developed World.
Australia is also the World’s biggest island and in its Western state, the A$5.43 billion Oakajee port and rail project looks like it may founder on lack of funding, albeit Murchison Metals (and its 50% partner and Mitsubishi) are putting a brave face on it. The port and associated infrastructure have been designed to export new sources of iron ore, as and when they have been developed.
And, finally the global ‘iron rush’ has reached the Democratic Republic of Congo where South Korea’s POSCO, the World’s third largest steelmaker, has signed a resources deal. At this time, however, the Congo’s iron ore industry is embryonic.
HEADLINES
• Iron ore imports in first six months rise 8.1%
• 62% spot prices at $171.2 as at 8 July; 11% off February’s record
• Dock side inventories (93.17 million tonnes) remain very close to their all-time peak
• Domestic iron ore production hits new record in May of 102.5 million tons
• Steel exports fell 10% in June versus May; but are ahead 3% in first six months
• Iron ore imports from India to China decline in June as monsoon slow shipments; although they are still ahead 8% year on year
• Vale see no slowdown in China’s demand for iron ore, says CFO
• Angang Steel says that net income in H1 is down by some 92% due to raw materials costs
• Kumba share price sets new record on iron ore pricing
• Australia’s Oakajee port and rail iron ore project may collapse due to lack of funding
• Gillard announces Australia's maiden carbon tax
• POSCO signs resources deal in Congo
• China’s restrictions on exports of nine raw materials break the rules, says WTO
Life has not been easy for the steel producers in terms of profits and margins as they have been unable to pass on the full and mammoth increased cost of raw materials. And this was underlined today by Angang Steel which said net income for the six months ended 30 June may have fallen by some 92% from a year earlier. Nonetheless, its share price rose 1.1% in morning trade to HK$8.85.
Perhaps most significant in the last seven days, however, were the bullish comments on China from Vale’s CFO Guilherme Cavalcanti. He said that the World’s largest iron ore producer sees no slowdown in demand from China as the Country seeks to build 36 million low income houses in the next five years. “We aren’t feeling any contraction in demand for iron ore mainly because infrastructure building is still going on in there and also social housing. The urbanisation process in China is far from over, so we think that these will keep leading the demand for iron ore”.
Elsewhere, Kumba is enjoying its days in the sun with a new record share price clear of Rand 500. This came after the Group said net profit for the six months to 30 June would be as much as 42% higher than the previous year - due to higher export iron ore prices. Kumba, 63.5% owned by Anglo American, is Africa’s largest exporter of iron ore and number four Worldwide.
In other news, Australia’s most unpopular Prime Minister since 1998, Julia Gillard, has announced her Country’s first tax on greenhouse gas emissions from July 2012. She is asking polluters to pay an initial charge of A$23 ($24.74) per ton of carbon dioxide (thereafter rising by the CPI plus 2.5% per annum). This compares with allowances of an average Euro 15.42 (A$20.45) per ton over the past year in Europe. Australia is the largest per-capita polluter in the developed World.
Australia is also the World’s biggest island and in its Western state, the A$5.43 billion Oakajee port and rail project looks like it may founder on lack of funding, albeit Murchison Metals (and its 50% partner and Mitsubishi) are putting a brave face on it. The port and associated infrastructure have been designed to export new sources of iron ore, as and when they have been developed.
And, finally the global ‘iron rush’ has reached the Democratic Republic of Congo where South Korea’s POSCO, the World’s third largest steelmaker, has signed a resources deal. At this time, however, the Congo’s iron ore industry is embryonic.
HEADLINES
• Iron ore imports in first six months rise 8.1%
• 62% spot prices at $171.2 as at 8 July; 11% off February’s record
• Dock side inventories (93.17 million tonnes) remain very close to their all-time peak
• Domestic iron ore production hits new record in May of 102.5 million tons
• Steel exports fell 10% in June versus May; but are ahead 3% in first six months
• Iron ore imports from India to China decline in June as monsoon slow shipments; although they are still ahead 8% year on year
• Vale see no slowdown in China’s demand for iron ore, says CFO
• Angang Steel says that net income in H1 is down by some 92% due to raw materials costs
• Kumba share price sets new record on iron ore pricing
• Australia’s Oakajee port and rail iron ore project may collapse due to lack of funding
• Gillard announces Australia's maiden carbon tax
• POSCO signs resources deal in Congo
• China’s restrictions on exports of nine raw materials break the rules, says WTO
Wednesday 6 July 2011
Stop press: interest rate rise
China raised interest rates for the third time this year today which underlines its policy preference to bring inflation under control even if/as economic growth eases. A number of economists also labelled it as a confident move and plumped for a soft, not hard, landing.
The 25 basis point increases in lending (to 6.56%) and deposit rates (to 3.5%) were announced after the local market had closed (and Europe was at lunch), come into effect tomorrow (Thursday 7 July).
HSBC, JPMorgan and Merrill Lynch said the increase may be the last this year as inflation moderates, most probably after clearing 6% in June (May’s CPI was at a 34 month high of 5.5%). Capital Economics, however, is looking for one more.
HSBC said that “China’s inflation battle is almost at an end. Already, there are signs that price pressures are coming off. Today’s rate hike may therefore have been the last in the cycle. In general, given that the authorities decided to raise rates also shows their confidence in the local economy. Worries over a hard landing on the Mainland are overblown”.
“Perhaps most interesting is that the benchmark rates for deposits of more than one year have been increased by more than 25 basis points ... while the increase in the benchmark rate for loans of longer duration was lower than for one-year loans” noted Capital Economics. “The goal is to encourage savers to keep their money in bank deposits rather than shifting to equities or property. At the same time, the People’s Bank is apparently concerned that continued lending rate increases could squeeze some longer-term borrowers”.
Credit Agricole’s take was: “the move will be seen as a sign of strength, with solid growth momentum allowing policymakers to raise rates – and in the end global markets should respond positively to such move aimed at controlling inflation”.
And finally, UBS said that China is unlikely to suffer a hard landing. May data show that the economy is maintaining momentum, with industrial production rising 13% and an acceleration in fixed asset investment. A Government plan to build millions of low cost homes may also sustain growth.
On 23 June, Premier Wen Jiabao said in his FT article that efforts to stem inflation have worked and that the pace of consumer price increases will slow. “The overall price level is within a controllable range and is expected to drop steadily”. And then, earlier this week, he added that stabilising prices remains the priority for the Chinese Government even though price pressures have been contained. “Some factors driving up prices have been controlled, but not eliminated”. Similarly, on Sunday, the PBOC added that China still faces “large” inflationary pressure and that it would maintain a “prudent” monetary policy.
Perhaps the money market rate on Tuesday provided a clue too. The seven day repurchase or ‘repo’ rate, which measures interbank funds availability, rose 201 basis points to 6.82% in morning trade (the largest rise since 15 June). Note, too, though that this rate had been as low as 4.74% last Friday (1 July); and in the week commencing 20 June it topped out at 9.20%.
“Those guys have been dead wrong for two years”
- Fabled investor, Jim Rogers on hedge funds shorting China
The 25 basis point increases in lending (to 6.56%) and deposit rates (to 3.5%) were announced after the local market had closed (and Europe was at lunch), come into effect tomorrow (Thursday 7 July).
HSBC, JPMorgan and Merrill Lynch said the increase may be the last this year as inflation moderates, most probably after clearing 6% in June (May’s CPI was at a 34 month high of 5.5%). Capital Economics, however, is looking for one more.
HSBC said that “China’s inflation battle is almost at an end. Already, there are signs that price pressures are coming off. Today’s rate hike may therefore have been the last in the cycle. In general, given that the authorities decided to raise rates also shows their confidence in the local economy. Worries over a hard landing on the Mainland are overblown”.
“Perhaps most interesting is that the benchmark rates for deposits of more than one year have been increased by more than 25 basis points ... while the increase in the benchmark rate for loans of longer duration was lower than for one-year loans” noted Capital Economics. “The goal is to encourage savers to keep their money in bank deposits rather than shifting to equities or property. At the same time, the People’s Bank is apparently concerned that continued lending rate increases could squeeze some longer-term borrowers”.
Credit Agricole’s take was: “the move will be seen as a sign of strength, with solid growth momentum allowing policymakers to raise rates – and in the end global markets should respond positively to such move aimed at controlling inflation”.
And finally, UBS said that China is unlikely to suffer a hard landing. May data show that the economy is maintaining momentum, with industrial production rising 13% and an acceleration in fixed asset investment. A Government plan to build millions of low cost homes may also sustain growth.
On 23 June, Premier Wen Jiabao said in his FT article that efforts to stem inflation have worked and that the pace of consumer price increases will slow. “The overall price level is within a controllable range and is expected to drop steadily”. And then, earlier this week, he added that stabilising prices remains the priority for the Chinese Government even though price pressures have been contained. “Some factors driving up prices have been controlled, but not eliminated”. Similarly, on Sunday, the PBOC added that China still faces “large” inflationary pressure and that it would maintain a “prudent” monetary policy.
Perhaps the money market rate on Tuesday provided a clue too. The seven day repurchase or ‘repo’ rate, which measures interbank funds availability, rose 201 basis points to 6.82% in morning trade (the largest rise since 15 June). Note, too, though that this rate had been as low as 4.74% last Friday (1 July); and in the week commencing 20 June it topped out at 9.20%.
“Those guys have been dead wrong for two years”
- Fabled investor, Jim Rogers on hedge funds shorting China
Real estate special (July No. 2): no one is going to crash and burn
'Top Gun' - Paramount Pictures (1986)
Kelly McGillis: “I’m Charlotte Blackwood”
Tom Cruise: “I’m Maverick”
KM: “Did your mother not like you?”
TC: “No, it’s my call sign”.
KM: “You're a pilot?”
TC: “That's right. A naval aviator”
TC: “Actually, we’ve only done this twice”
KM: “How did you do?”
TC: “Crashed and burned on the first one”
KM: “And the second?”
TC: “I'll tell you tomorrow but it’s looking good so far.
A soft landing for the real estate sector in China is being predicted (empirically) by Stephen Green, Senior Economist at Standard Chartered (SC). This follows an exclusive survey of developers and - when Green was asked on CNBC TV: “so no one is going to crash and burn?” - he said “not so far”.
This call is also made despite rising inventories of houses in 35 Chinese major cities, exacerbated by an increasing land supply (a Government measure to cool house price inflation). In fact, SC says inventories in these cities started to turn positive in Q3 2010 and currently stand at about three months worth of supply; levels not seen since the bottom of the market in 2008-09. “In the second half, assuming sales remain at the present level, we estimate an increase in inventories to seven months’ worth by year-end”.
China’s land prices, which have been falling, could come under further pressure too, according to the survey. It forecasts price cuts of up to 20% in many cities over the course of 2012 as Government’s measures also limit demand. But SC does not believe that rising inventories point to a collapse in China’s real estate market. “Developers are still building, which is good for growth; prices are stable, people are still buying which is good for the Government”; especially with 30% deposits from first time buyers. Indeed, while the survey showed that property sales in top tier cities halved to 12 million square metres in May from 20-25 million in 2009, some 130,000 new apartments were still being sold each month or an average of 4,500 a day.
Green also stressed that commercial building is set to rise over the next three months, according to at least half of the developers surveyed. Social housing is also pretty active and while, the Government’s 10 million unit target for the year will be missed, real estate construction could see a pretty strong second half and this will feed through to iron ore demand, copper etc, he added
Yes, property loan defaults are on the rise, says SC, according to a “significant minority” of developers. Similarly, smaller developers have been selling land and work in progress to other developers – which suggest they may be under some financial pressure. The large developers, however, are well funded. Indeed, bank lending to the Sector is still increasing and SC does not see a large number of bankruptcies i.e. no collapse. That said, developers told SC that they expected further tightening. However, the China Real Estate and Housing Research Association said it did not think the Government would take further steps at this point.
Elsewhere, China Real Estate Index System (CREIS), which is affiliated to Soufun, says that average land cost for residential use in 130 cities dropped 13%, in the January through June period from a year earlier, to Yuan 1,451 ($225) per square metre. This follows hot on the heels of Soufun, the Country’s largest online real estate firm, showing that transactions in residential land fell 6% in the first six months from a year earlier to 162 million square metres.
In reality, both lower prices and transactions have discouraged local government from selling land for residential use. This meant that the scale of transactions here declined by 15% in the first half from the same period of 2010 (to 195 million square metres), despite a quickened pace in June, added CREIS.
On a more positive note, China’s largest developers saw strong sales growth in the first half of this year, despite stricter government controls on the market. Combined sales of the top 10 developers leapt 80% year-on-year to Yuan 332.3 billion, according to data compiled by the China Real Estate Information Corporation (CREIC).
Finally, Wal-Mart, Ikea and other foreign retailers are now buying land in China for their new stores, instead of renting as they have done for 10 years or so. Wal-Mart, the World’s largest retailer, has bought sites in north eastern Dalian, while Inter Ikea Centre, the developer part-owned by Sweden’s Ikea, has invested $1.2 billion to build 510,000 square metres (5.5 million square feet). Ikea is the World’s largest home furnishings company. Cushman & Wakefield says that China is in the “era” for malls.
“I’m going to need a beer, to put these flames out...” - TC
SHANGHAI COMPOSITE
Today: -0.21% to 2,810.48 at close
This week: +1.85%
June: +0.7%
Q2: -5.7%
YTD: +0.1%
Year ago: +16.7%
HANG SENG:
Today: -1.01% to 22,517.55 at close
Last week: +0.53%
June: -6.4%
Q2: -4.8%
YTD: -2.3%
Year ago: +12.1%
OIL FUTURES: $96.32
GOLD FUTURES: $1513.80
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4530
Kelly McGillis: “I’m Charlotte Blackwood”
Tom Cruise: “I’m Maverick”
KM: “Did your mother not like you?”
TC: “No, it’s my call sign”.
KM: “You're a pilot?”
TC: “That's right. A naval aviator”
TC: “Actually, we’ve only done this twice”
KM: “How did you do?”
TC: “Crashed and burned on the first one”
KM: “And the second?”
TC: “I'll tell you tomorrow but it’s looking good so far.
A soft landing for the real estate sector in China is being predicted (empirically) by Stephen Green, Senior Economist at Standard Chartered (SC). This follows an exclusive survey of developers and - when Green was asked on CNBC TV: “so no one is going to crash and burn?” - he said “not so far”.
This call is also made despite rising inventories of houses in 35 Chinese major cities, exacerbated by an increasing land supply (a Government measure to cool house price inflation). In fact, SC says inventories in these cities started to turn positive in Q3 2010 and currently stand at about three months worth of supply; levels not seen since the bottom of the market in 2008-09. “In the second half, assuming sales remain at the present level, we estimate an increase in inventories to seven months’ worth by year-end”.
China’s land prices, which have been falling, could come under further pressure too, according to the survey. It forecasts price cuts of up to 20% in many cities over the course of 2012 as Government’s measures also limit demand. But SC does not believe that rising inventories point to a collapse in China’s real estate market. “Developers are still building, which is good for growth; prices are stable, people are still buying which is good for the Government”; especially with 30% deposits from first time buyers. Indeed, while the survey showed that property sales in top tier cities halved to 12 million square metres in May from 20-25 million in 2009, some 130,000 new apartments were still being sold each month or an average of 4,500 a day.
Green also stressed that commercial building is set to rise over the next three months, according to at least half of the developers surveyed. Social housing is also pretty active and while, the Government’s 10 million unit target for the year will be missed, real estate construction could see a pretty strong second half and this will feed through to iron ore demand, copper etc, he added
Yes, property loan defaults are on the rise, says SC, according to a “significant minority” of developers. Similarly, smaller developers have been selling land and work in progress to other developers – which suggest they may be under some financial pressure. The large developers, however, are well funded. Indeed, bank lending to the Sector is still increasing and SC does not see a large number of bankruptcies i.e. no collapse. That said, developers told SC that they expected further tightening. However, the China Real Estate and Housing Research Association said it did not think the Government would take further steps at this point.
Elsewhere, China Real Estate Index System (CREIS), which is affiliated to Soufun, says that average land cost for residential use in 130 cities dropped 13%, in the January through June period from a year earlier, to Yuan 1,451 ($225) per square metre. This follows hot on the heels of Soufun, the Country’s largest online real estate firm, showing that transactions in residential land fell 6% in the first six months from a year earlier to 162 million square metres.
In reality, both lower prices and transactions have discouraged local government from selling land for residential use. This meant that the scale of transactions here declined by 15% in the first half from the same period of 2010 (to 195 million square metres), despite a quickened pace in June, added CREIS.
On a more positive note, China’s largest developers saw strong sales growth in the first half of this year, despite stricter government controls on the market. Combined sales of the top 10 developers leapt 80% year-on-year to Yuan 332.3 billion, according to data compiled by the China Real Estate Information Corporation (CREIC).
Finally, Wal-Mart, Ikea and other foreign retailers are now buying land in China for their new stores, instead of renting as they have done for 10 years or so. Wal-Mart, the World’s largest retailer, has bought sites in north eastern Dalian, while Inter Ikea Centre, the developer part-owned by Sweden’s Ikea, has invested $1.2 billion to build 510,000 square metres (5.5 million square feet). Ikea is the World’s largest home furnishings company. Cushman & Wakefield says that China is in the “era” for malls.
“I’m going to need a beer, to put these flames out...” - TC
SHANGHAI COMPOSITE
Today: -0.21% to 2,810.48 at close
This week: +1.85%
June: +0.7%
Q2: -5.7%
YTD: +0.1%
Year ago: +16.7%
HANG SENG:
Today: -1.01% to 22,517.55 at close
Last week: +0.53%
June: -6.4%
Q2: -4.8%
YTD: -2.3%
Year ago: +12.1%
OIL FUTURES: $96.32
GOLD FUTURES: $1513.80
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4530
Monday 4 July 2011
90 not out
The time to be nervous, as any self-respecting batter in cricket will tell you, is when you approach that milestone of milestones 100 runs (or, for readers in North America, 100 ‘points’). This is especially true when you are nine-tenths of the way there.
So it is with the Communist Party of China or CPC, which celebrated its 90th anniversary on Friday (1 July). Sure, there have been a myriad of colourful celebrations across this seemingly limitless Nation and much glad-handing. Nonetheless, as the Chinese population becomes more affluent and more geopolitically (and cyber) aware, there is pressure for change. The latter centres on individual and political freedom plus the gargantuan wealth gap between the haves and the have-nots (8% of the population shared 35% of the GDP in 2009). But there is a split here, too, between those who want a more democratic government and, what has been dubbed ‘the new left’, which is plumping for populist authoritarianism (not an oxymoron).
The smart money says it is more likely to be the latter than the former, but the CPC has not been in charge for 90 years without being dynamic; and this will continue. For example, in President Hu Jintao’s keynote (and celebratory speech) on Friday, there were many references to the people and improving their lives. In my view, too, there was a sub-text of ‘adapt or die’.
Fundamental to delivering Hu’s promises is the management and performance of the economy, and there are headwinds here right now. These, too, were forecast by China’s Vice Premier Wang Oishan speaking at the weekend to the State Council. He said that the Government’s economic growth target for this year (8%) will be “very challenging” to achieve. He added that the domestic and global situation is “extremely complicated and uncertain”, making it more difficult for the Government to strike a good balance between developing the economy and curbing inflation. No argument here. Wen, too, admitted - on his European tour - that China’s inflation target for 2011 is now more like “under 5%” than the original 4% (although it is under control and will recede). In addition, a number of commentators see the CPI clearing, temporarily, 6% for June (data are out on 15 July).
But Hu, Wen and Wang have not been sitting on their hands and monetary policy tightening is making itself felt. For example, the official manufacturing PMI from the China Federation of Logistics and Purchasing (CFLP) hit a 28 month low of 50.9 in June (down from 52.0 in May). Note, too, that input prices were sharply lower (56.7 versus 60.3). The same goes for China’s non-manufacturing industries, which expanded at the slowest pace in four months in June i.e. the CFLP said today that its latest PMI showed a drop from 61.9 in May to 57.0 in June. Input inflation eased here, too, from 62.0 to 61.6. The Federation also said that the Nation’s services or non-manufacturing sector (which still accounts for less than 45% of GDP) is maintaining quite quick growth; and affordable housing construction has accelerated. It added, too, that Chinese stocks are “oversold” as concerns such as bank loans to local government and the slowdown in real estate are being factored in by investors.
Equally impressive is the movement in the seven day repurchase rate, which measures interbank funding availability. It fell 116 basis points in morning trade today in Shanghai to 4.74%. In the week commencing 20 June it topped out at 9.2%. Does this point to there being no further interest rate hikes in the near term? I reckon it might, as does Standard Chartered which says China’s stocks are the “most attractive” and investors should buy more of its equities as the Government achieves a “soft landing”. “The China market is the most promising market among the major markets in the World”. Nomura is also a buyer due to valuations having already factored in monetary policy tightening amid “less aggressive” interest rate increases. A slowdown in consumer price inflation, more fiscal stimulus and increased efforts to boost investment will also lift equities, it said; plus “a soft-landing scenario”. China Business went on step further and said that there may even be some imminent (albeit selective) policy easing.
The Shanghai Composite has risen 7.3% since 20 June, the Monday of the week before Wen’s seminal Thursday article in the FT ahead of his European tour: “there is concern as to whether China can rein in inflation and sustain its rapid development - my answer is an emphatic yes”.
“They came to see me bat not to see you bowl”
- W. G. Grace (1848-1915) cricketer, physician and surgeon
SHANGHAI COMPOSITE
Today: +1.94% to 2,812.21
Last week: +0.48%
June: +0.7%
Q2: -5.7%
YTD: +0.2%
Year ago: +18.0%
HANG SENG:
Today: +1.66% to 22,770.47
Last week: +2.20%
June: -6.4%
Q2: -4.8%
YTD: -1.2%
Year ago: +14.4%
OIL FUTURES: $95.30
GOLD FUTURES: $1494.60
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4530
HEADLINES
COMMUNIST PARTY OF CHINA (CPC) MARKS 90 YEAR ANNIVERSARY WITH KEYNOTE SPEECH BY PRESIDENT HU JINTAO
• three milestones: relying on the people; completing the new democratic revolution; plus winning national independence and liberation of the people
• uphold and adapt Marxism, scientifically, to new conditions and current times
• speed up the training of young talented people: “talent is the most important resource and a strategic resource...”
• adhere to and improve socialism with Chinese characteristics; plus create decent lives for its people
• all people are equal before law
• alienation from people is the greatest risk for CPC
• we must intensify our efforts to combat corruption
• continue reform and ‘opening up’ for future development
• China remains the largest developing country in World
• vigorous development and enrichment of socialist culture
• ensure and improve people's wellbeing
• “Without stability, nothing could be done, and even the achievements already made could be lost”
• the CPC has absolute leadership over army
• promote peaceful development of relations across Taiwan Straits
• actively and prudently carry out political structural reform to continue to promote world peace
ECONOMY
• Official manufacturing PMI hits 28 month low of 50.9 in June (from 52.0 in May) as monetary policy tighten and global demand eases; but imports also dipped (48.7 versus 50.5) as did input prices (56.7 versus 60.3)
• China services sector expands at slowest pace in four months as its PMI in June dips from 61.9 to 57.0 says Logistic Federation; but input inflation here also eased (from 62.0 to 61.6)
• China to grow above 9.3% in 2011, says NRDC’s State Information Centre (despite Q3 dip to less than 9%); with annualised inflation above-target at 4.9%
• China’s Vice Premier Wang Oishan says economic growth target for this year will be “very challenging”; and it is more difficult for the Government to strike a good balance between developing the economy and curbing inflation
• Inflation may climb to 6.5% in June because of surging pork prices, says Shenyin & Wanguo Securities; and borrowing costs may rise around the time of the release of June economic data (15 July)
• Industrial production forecast at 13.5% for 2011 (including 13.9% in H1) and exports at 21% (incl. 24.8% in H1), according to the State Information Centre
• Industrial profits in first five months of 2011 rise 27.9% year-on-year to $296.5 billion – which compares with 29.7% in first four months; however, ferrous metal mining companies posted a 56% jump in earnings
MONEY
• Yuan gains for a sixth quarter as China seeks to stem inflation; including +1.3% in Q2 to end at 6.4649 (after record of 6.4605 on 23 June); and 12 Month Forwards point to a further +1.4%
• Seven day repurchase or ‘repo’ rate falls 116 basis points today (Monday) to 4.74%, after peaking at 9.2% in w/c 20 June
• Some banks are offering double short-term deposit rates of 7% in order to attract cash
• Non-performing loans at Chinese banks could rise from 1 to 5% of total lending, says Moodys; but this will not hurt ratings (no time frame given)
WEN IN EUROPE (continued)
• Wen's European tour concludes with deals worth over $20 billion in Hungary, the UK and Germany
• Agrees that 4% inflation target is a struggle; plumps for ‘under 5%’
• Calls for greater democracy and reforms
• Wen says China will stimulate domestic demand and reduce its surplus on his European tour; he also popped into Stratford-upon-Avon, birthplace of William Shakespeare, who he admires
• China could easily solve the Euro crisis on its own, says Templeton’s Mark Mobius; it would be small change
INDUSTRY
• Buffett-backed BYD surged 41% to Yuan 25.45 on first day trading in Shenzhen
• Lafarge’s Sichuan Shuangma Cement plans to raise Yuan 2.8 billion from private share sale
• Chinese police arrest 36 over fraud at Alibaba.com – which is its biggest B2B e-commerce platform
DOMESTIC
• China lifts threshold for paying income tax from Yuan 2,000 to 3,500 ($542) – which is more than expected and follows a rare public outcry; it will be effective from 1 September and the change means that only 7.7% of China’s salary earners or 24 million people will pay income tax
• Average minimum wage is likely to grow by at least 13% per annum over the next five years, says Ministry of Human Resources and Social Security.; this follows +24% last year
• China opens World’s longest sea bridge 26 miles or 42 kilometres across Jiaozhou Bay from Qingdao to the island of Huangdao
• Hong Kong had a holiday on Friday 1 July for Establishment Day recognising the hand over, in 1997, of the City to the PRC
INTERNATIONAL
• 13 day freight rail link from China to Germany opens officially
• Taiwan raises its benchmark interest rates from 1.75 to 1.875%, to be effective from 30 June
So it is with the Communist Party of China or CPC, which celebrated its 90th anniversary on Friday (1 July). Sure, there have been a myriad of colourful celebrations across this seemingly limitless Nation and much glad-handing. Nonetheless, as the Chinese population becomes more affluent and more geopolitically (and cyber) aware, there is pressure for change. The latter centres on individual and political freedom plus the gargantuan wealth gap between the haves and the have-nots (8% of the population shared 35% of the GDP in 2009). But there is a split here, too, between those who want a more democratic government and, what has been dubbed ‘the new left’, which is plumping for populist authoritarianism (not an oxymoron).
The smart money says it is more likely to be the latter than the former, but the CPC has not been in charge for 90 years without being dynamic; and this will continue. For example, in President Hu Jintao’s keynote (and celebratory speech) on Friday, there were many references to the people and improving their lives. In my view, too, there was a sub-text of ‘adapt or die’.
Fundamental to delivering Hu’s promises is the management and performance of the economy, and there are headwinds here right now. These, too, were forecast by China’s Vice Premier Wang Oishan speaking at the weekend to the State Council. He said that the Government’s economic growth target for this year (8%) will be “very challenging” to achieve. He added that the domestic and global situation is “extremely complicated and uncertain”, making it more difficult for the Government to strike a good balance between developing the economy and curbing inflation. No argument here. Wen, too, admitted - on his European tour - that China’s inflation target for 2011 is now more like “under 5%” than the original 4% (although it is under control and will recede). In addition, a number of commentators see the CPI clearing, temporarily, 6% for June (data are out on 15 July).
But Hu, Wen and Wang have not been sitting on their hands and monetary policy tightening is making itself felt. For example, the official manufacturing PMI from the China Federation of Logistics and Purchasing (CFLP) hit a 28 month low of 50.9 in June (down from 52.0 in May). Note, too, that input prices were sharply lower (56.7 versus 60.3). The same goes for China’s non-manufacturing industries, which expanded at the slowest pace in four months in June i.e. the CFLP said today that its latest PMI showed a drop from 61.9 in May to 57.0 in June. Input inflation eased here, too, from 62.0 to 61.6. The Federation also said that the Nation’s services or non-manufacturing sector (which still accounts for less than 45% of GDP) is maintaining quite quick growth; and affordable housing construction has accelerated. It added, too, that Chinese stocks are “oversold” as concerns such as bank loans to local government and the slowdown in real estate are being factored in by investors.
Equally impressive is the movement in the seven day repurchase rate, which measures interbank funding availability. It fell 116 basis points in morning trade today in Shanghai to 4.74%. In the week commencing 20 June it topped out at 9.2%. Does this point to there being no further interest rate hikes in the near term? I reckon it might, as does Standard Chartered which says China’s stocks are the “most attractive” and investors should buy more of its equities as the Government achieves a “soft landing”. “The China market is the most promising market among the major markets in the World”. Nomura is also a buyer due to valuations having already factored in monetary policy tightening amid “less aggressive” interest rate increases. A slowdown in consumer price inflation, more fiscal stimulus and increased efforts to boost investment will also lift equities, it said; plus “a soft-landing scenario”. China Business went on step further and said that there may even be some imminent (albeit selective) policy easing.
The Shanghai Composite has risen 7.3% since 20 June, the Monday of the week before Wen’s seminal Thursday article in the FT ahead of his European tour: “there is concern as to whether China can rein in inflation and sustain its rapid development - my answer is an emphatic yes”.
“They came to see me bat not to see you bowl”
- W. G. Grace (1848-1915) cricketer, physician and surgeon
SHANGHAI COMPOSITE
Today: +1.94% to 2,812.21
Last week: +0.48%
June: +0.7%
Q2: -5.7%
YTD: +0.2%
Year ago: +18.0%
HANG SENG:
Today: +1.66% to 22,770.47
Last week: +2.20%
June: -6.4%
Q2: -4.8%
YTD: -1.2%
Year ago: +14.4%
OIL FUTURES: $95.30
GOLD FUTURES: $1494.60
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4530
HEADLINES
COMMUNIST PARTY OF CHINA (CPC) MARKS 90 YEAR ANNIVERSARY WITH KEYNOTE SPEECH BY PRESIDENT HU JINTAO
• three milestones: relying on the people; completing the new democratic revolution; plus winning national independence and liberation of the people
• uphold and adapt Marxism, scientifically, to new conditions and current times
• speed up the training of young talented people: “talent is the most important resource and a strategic resource...”
• adhere to and improve socialism with Chinese characteristics; plus create decent lives for its people
• all people are equal before law
• alienation from people is the greatest risk for CPC
• we must intensify our efforts to combat corruption
• continue reform and ‘opening up’ for future development
• China remains the largest developing country in World
• vigorous development and enrichment of socialist culture
• ensure and improve people's wellbeing
• “Without stability, nothing could be done, and even the achievements already made could be lost”
• the CPC has absolute leadership over army
• promote peaceful development of relations across Taiwan Straits
• actively and prudently carry out political structural reform to continue to promote world peace
ECONOMY
• Official manufacturing PMI hits 28 month low of 50.9 in June (from 52.0 in May) as monetary policy tighten and global demand eases; but imports also dipped (48.7 versus 50.5) as did input prices (56.7 versus 60.3)
• China services sector expands at slowest pace in four months as its PMI in June dips from 61.9 to 57.0 says Logistic Federation; but input inflation here also eased (from 62.0 to 61.6)
• China to grow above 9.3% in 2011, says NRDC’s State Information Centre (despite Q3 dip to less than 9%); with annualised inflation above-target at 4.9%
• China’s Vice Premier Wang Oishan says economic growth target for this year will be “very challenging”; and it is more difficult for the Government to strike a good balance between developing the economy and curbing inflation
• Inflation may climb to 6.5% in June because of surging pork prices, says Shenyin & Wanguo Securities; and borrowing costs may rise around the time of the release of June economic data (15 July)
• Industrial production forecast at 13.5% for 2011 (including 13.9% in H1) and exports at 21% (incl. 24.8% in H1), according to the State Information Centre
• Industrial profits in first five months of 2011 rise 27.9% year-on-year to $296.5 billion – which compares with 29.7% in first four months; however, ferrous metal mining companies posted a 56% jump in earnings
MONEY
• Yuan gains for a sixth quarter as China seeks to stem inflation; including +1.3% in Q2 to end at 6.4649 (after record of 6.4605 on 23 June); and 12 Month Forwards point to a further +1.4%
• Seven day repurchase or ‘repo’ rate falls 116 basis points today (Monday) to 4.74%, after peaking at 9.2% in w/c 20 June
• Some banks are offering double short-term deposit rates of 7% in order to attract cash
• Non-performing loans at Chinese banks could rise from 1 to 5% of total lending, says Moodys; but this will not hurt ratings (no time frame given)
WEN IN EUROPE (continued)
• Wen's European tour concludes with deals worth over $20 billion in Hungary, the UK and Germany
• Agrees that 4% inflation target is a struggle; plumps for ‘under 5%’
• Calls for greater democracy and reforms
• Wen says China will stimulate domestic demand and reduce its surplus on his European tour; he also popped into Stratford-upon-Avon, birthplace of William Shakespeare, who he admires
• China could easily solve the Euro crisis on its own, says Templeton’s Mark Mobius; it would be small change
INDUSTRY
• Buffett-backed BYD surged 41% to Yuan 25.45 on first day trading in Shenzhen
• Lafarge’s Sichuan Shuangma Cement plans to raise Yuan 2.8 billion from private share sale
• Chinese police arrest 36 over fraud at Alibaba.com – which is its biggest B2B e-commerce platform
DOMESTIC
• China lifts threshold for paying income tax from Yuan 2,000 to 3,500 ($542) – which is more than expected and follows a rare public outcry; it will be effective from 1 September and the change means that only 7.7% of China’s salary earners or 24 million people will pay income tax
• Average minimum wage is likely to grow by at least 13% per annum over the next five years, says Ministry of Human Resources and Social Security.; this follows +24% last year
• China opens World’s longest sea bridge 26 miles or 42 kilometres across Jiaozhou Bay from Qingdao to the island of Huangdao
• Hong Kong had a holiday on Friday 1 July for Establishment Day recognising the hand over, in 1997, of the City to the PRC
INTERNATIONAL
• 13 day freight rail link from China to Germany opens officially
• Taiwan raises its benchmark interest rates from 1.75 to 1.875%, to be effective from 30 June
Sunday 3 July 2011
Real estate special: the medicine is working
SouFun, which is China’s largest real estate website owner, has reported that home prices in June eased in 8-out-of-10 of the Nation’s largest cities, month on month (only Hangzhou and Tianjin were exempt). That said, 75 out of the 100 cities surveyed reported higher prices; and, nationally, house prices rose 0.4% in June, month on month, and by 5.2% year-on-year.
In part, this reflects Government action to restrain the real estate sector, generally, and residential, in particular. For example, this year it has raised down payment percentages to 30% on first homes and 60% on second, introduced mortgage requirements and imposed purchase restrictions and taxes in some cities. The PBOC has also raised interest rates four times since October (when it increased borrowing costs for the first time in three years).
CICC commented that “price growth in big cities slowed, but it takes time for a nationwide adjustment. The situation with a shortage in housing supply is just gradually improving”.
Turning to a quarterly opinion poll by the PBOC’s Beijing branch, some 65% of residents expected the Government to enact further property tightening measures, including further increases in down payments and mortgage rates. In addition, some 60% of respondents also said they had postponed home purchases as they expect prices to fall. I am sure that this and other more alarming statistics - in Curate’s egg veracity - are correct in certain parts of the Country. Nonetheless, I also think that many of us Western commentators fail to fully appreciate the scale, range and diversity of the Chinese market (and psyche). We also externalise our own residential market dynamics. Added to the mix, is a (short-sighted) cynicism of the Chinese Government’s economic management.
Sure there are over-heated pockets within the myriad of markets which comprise the Chinese housing sector. There are also areas of dramatic over-supply (which is largely a cultural thing). But, for my money the Government is doing the right thing; and it will enact a cure not a fatality.
Check out, too, the property sub-sector within the Shanghai Composite which is now 10.2% to the good in 2011 to date, in a wider equity market off 1.7% (as at 1 July). Elsewhere, too, a developer paid Yuan 710 million for a 6,030 square metre plot in Beijing.
Daiwa Capital Markets also sees no signs of a hard landing for China’s real estate market. It points out that gross floor area sales and average selling prices for residential property rose modestly in the first five months of 2011. “We expect valuations to improve amid continued improvements in major developers’ contract sales. We recommend that investors take advantage of any further sector weakness to accumulate holdings”. It adds, too, that M&A activity will increase and that a number of small-and mid-cap listed Chinese property developers may go private. Earlier this year, for example, Fosun International, the parent of Shanghai Forte Land took the Company private paying a 30% premium for the privilege. And, more recently, Gemdale agreed to buy a 62% stake in Chi Cheung Investment Company from Billion Up, a unit of Chinese Estates Holdings, for $107 million.
The UK-based property investor Grosvenor is also shifting the focus of its portfolio to China and has invested up to £1 billion in residential property projects in China and other core areas.
In the affordable homes sector, where the Government has pledged to build 36 million homes over the next five years (at an estimated cost of more than $619 billion), there is more mixed news. But, that most precious of beings, the Government’s reputation is at stake. My money is on the Government (even with its new leaders who are to be elected next year).
“Physician, heal thyself” - King James Bible
HEADLINES
MARKET
• Home prices in June ease in 8-out-of-10 largest cities, says SouFun; and nationwide prices rose 0.4% in June, month on month, and 5.2% year-on-year
• China’s local governments may loosen property constraints in order to ease debt burden; National Audit Office puts borrowings at $1.7 trillion (December 2010)
• Buy small and mid-cap developers before they go private, says Daiwa; which also sees no hard landing for real estate
• Further tightening expected and house price falls, says PBOC poll in Beijing
• Yuan 710 million paid for 6,030 square metre plot in Beijing
• NRDC fines 12 developers Yuan 3.6 million for breaking new rules
COMPANIES
• Developer Gemdale buys 62% in rival Chi Cheung for $107 million
• Grosvenor bets on residential sector in China
AFFORDABLE HOUSING SECTOR
• Only 30 of China’s top 100 property firms participated in affordable homes scheme 2007 through 2010, says Housing Ministry
• Trust funds for affordable housing are set to surpass Yuan 10 billion this year
• Finance Ministry will make a 2011 maiden issue of Yuan 50.4 billion in bonds on behalf of 11 local governments to support the construction of affordable housing
• China’s State Audit Office uncovers misuse of funds in the affordable housing programme
HONG KONG
• Hong Kong’s annual anti-Government rally over home prices draws thousands; and it resulted in more than 200 arrests
In part, this reflects Government action to restrain the real estate sector, generally, and residential, in particular. For example, this year it has raised down payment percentages to 30% on first homes and 60% on second, introduced mortgage requirements and imposed purchase restrictions and taxes in some cities. The PBOC has also raised interest rates four times since October (when it increased borrowing costs for the first time in three years).
CICC commented that “price growth in big cities slowed, but it takes time for a nationwide adjustment. The situation with a shortage in housing supply is just gradually improving”.
Turning to a quarterly opinion poll by the PBOC’s Beijing branch, some 65% of residents expected the Government to enact further property tightening measures, including further increases in down payments and mortgage rates. In addition, some 60% of respondents also said they had postponed home purchases as they expect prices to fall. I am sure that this and other more alarming statistics - in Curate’s egg veracity - are correct in certain parts of the Country. Nonetheless, I also think that many of us Western commentators fail to fully appreciate the scale, range and diversity of the Chinese market (and psyche). We also externalise our own residential market dynamics. Added to the mix, is a (short-sighted) cynicism of the Chinese Government’s economic management.
Sure there are over-heated pockets within the myriad of markets which comprise the Chinese housing sector. There are also areas of dramatic over-supply (which is largely a cultural thing). But, for my money the Government is doing the right thing; and it will enact a cure not a fatality.
Check out, too, the property sub-sector within the Shanghai Composite which is now 10.2% to the good in 2011 to date, in a wider equity market off 1.7% (as at 1 July). Elsewhere, too, a developer paid Yuan 710 million for a 6,030 square metre plot in Beijing.
Daiwa Capital Markets also sees no signs of a hard landing for China’s real estate market. It points out that gross floor area sales and average selling prices for residential property rose modestly in the first five months of 2011. “We expect valuations to improve amid continued improvements in major developers’ contract sales. We recommend that investors take advantage of any further sector weakness to accumulate holdings”. It adds, too, that M&A activity will increase and that a number of small-and mid-cap listed Chinese property developers may go private. Earlier this year, for example, Fosun International, the parent of Shanghai Forte Land took the Company private paying a 30% premium for the privilege. And, more recently, Gemdale agreed to buy a 62% stake in Chi Cheung Investment Company from Billion Up, a unit of Chinese Estates Holdings, for $107 million.
The UK-based property investor Grosvenor is also shifting the focus of its portfolio to China and has invested up to £1 billion in residential property projects in China and other core areas.
In the affordable homes sector, where the Government has pledged to build 36 million homes over the next five years (at an estimated cost of more than $619 billion), there is more mixed news. But, that most precious of beings, the Government’s reputation is at stake. My money is on the Government (even with its new leaders who are to be elected next year).
“Physician, heal thyself” - King James Bible
HEADLINES
MARKET
• Home prices in June ease in 8-out-of-10 largest cities, says SouFun; and nationwide prices rose 0.4% in June, month on month, and 5.2% year-on-year
• China’s local governments may loosen property constraints in order to ease debt burden; National Audit Office puts borrowings at $1.7 trillion (December 2010)
• Buy small and mid-cap developers before they go private, says Daiwa; which also sees no hard landing for real estate
• Further tightening expected and house price falls, says PBOC poll in Beijing
• Yuan 710 million paid for 6,030 square metre plot in Beijing
• NRDC fines 12 developers Yuan 3.6 million for breaking new rules
COMPANIES
• Developer Gemdale buys 62% in rival Chi Cheung for $107 million
• Grosvenor bets on residential sector in China
AFFORDABLE HOUSING SECTOR
• Only 30 of China’s top 100 property firms participated in affordable homes scheme 2007 through 2010, says Housing Ministry
• Trust funds for affordable housing are set to surpass Yuan 10 billion this year
• Finance Ministry will make a 2011 maiden issue of Yuan 50.4 billion in bonds on behalf of 11 local governments to support the construction of affordable housing
• China’s State Audit Office uncovers misuse of funds in the affordable housing programme
HONG KONG
• Hong Kong’s annual anti-Government rally over home prices draws thousands; and it resulted in more than 200 arrests
Iron & Steel Special: “Wake up and…”
T.S. Eliot said that “the first condition of understanding a foreign country is to smell it”. I agree. But, for me, last week in Barcelona it certainly didn’t smell like Spain was in recession. It is, of course, with unemployment in excess of 20% (and more than double that for youths). Nonetheless, vibrancy and optimism (especially about tourism) remain. Greece it is not.
Being away, though, meant digesting a week’s cooking of iron and steel news on my return. Here the aroma was mostly pleasant, albeit there was also the odd, less pleasant waft knocking about. For example, China’s average daily output of steel remained comfortably above 1.9 million tonnes per day for the middle 10 days or so of June. However Custeel.com also pointed out in the period 11 through 20 June, it fell 0.67% (to 1.955 million tonnes) from the previous 10 days. Power rationing and slower summer demand prompted some factories to cut output. The China Iron & Steel Industry Association has also sounded a cautious short-term note driven by rising energy prices and tighter monetary policies. Nonetheless, its forecast that steel demand in China may rise by as much as a quarter between 2010 and 2015 remains intact.
Elsewhere, global iron ore’s number two chef, Rio Tinto, said there is no sign of demand for iron ore slipping and it is serving up as much as possible, with demand strong in China as well as Japan, Korea and Taiwan. “We are producing flat out” said Rio’s Iron Ore CEO Sam Walsh, adding that there are healthy queues at its Western Australia iron ore ports.
Number one chef, Vale, is, however, reported to be less bullish about the prospects for iron ore; albeit this needs to be kept in context. Sure, its new CEO has reduced the Company’s 2015 iron ore eating target by 10% to 469 million metric tons, as demand in China is expected to slow. But this compares with expected output this year of 301 million (up 1% year on year). Vale has also announced that it will buy back as much as $3 billion of its shares over the next half year; with iron ore prices where they are, it can afford to do so.
Not to be out done, number three in the kitchen (but number one overall), BHP Billiton, may add to the almost $23 billion it has spent since 2004 buying back stock. The Company reported on Thursday that it had completed a $10 billion share buyback, six months ahead of schedule. Spending that amount again would still leave scope for a $65 billion acquisition in the second half without “excessive” stress according to Liberum Capital.
Also hot is the Reserve Bank of Australia. It’s index of commodity prices rose 1.3% in June to a new all-time high of 149.8, on the back of rising contract prices for iron ore and coal (2008 saw the previous peak at just 119.5). This is a good job, too, for Gindalbie Metals which may need a speedy share issue and additional trade funding for both its new iron ore project at Karara in Western Australia ($2.7 billion) and the associated Oakajee port/rail facility (now put at $5.8 billion). Once more, the Chinese are reported to be at the table (Angang Steel) as is Murchison Metals, whose share price has fallen sharply as a result.
China’s mining companies have also put M&A back on the menu after a short break. This suggests that the Sector still has the appetite and the funds for overseas acquisitions, even as the Government’s tightens. According to Ernst & Young, M&A deals involving Chinese mining companies increased from $2.1 billion at the end of March to $5.3 billion at the end of May. It also expects M&A activity to accelerate further, outpacing 2010 by 15-25%. “In some ways there is still this requirement for resource security whether or not China is going to have a soft landing”. This includes interest in Sundance Resources’ $4.6 billion iron ore appetiser in West Africa (35 million tonnes per annum from 2014) to which new investors are being invited; thereby joining its largest shareholder (with 19%), the privately-owned Sichuan Hanlong Group.
That said China Hanking, an iron ore producer, has postponed a planned IPO of up to $254 million in Hong Kong due to difficult equity market indigestion.
More enthusiastic is Russia’s United Metallurgical Company (aka OMK) which plans to table some $4 billion of project investment. This includes a new dish (at least to me) called “direct- reduced” iron, a refined form of iron ore which can be used to produce steel without adding coking coal.
Finally, we have the mixed feast of shipping rates: those chartering ships for iron ore and coal transport are doing very well indeed, thank you; while the ship owners are starving. For example, capesize charter rates have sunk 50% in a year and even a record level of ship scrapping (48 this year says Clarkson) has failed to revive them because 117 new vessels have been launched this year. “One man’s meat is another man’s poison”, as Lucretius, the ancient Roman cook said.
HEADLINES
• China’s daily output of crude steel shows a dip in mid-June, due to power rationing and slower summer demand; but tonnage remains above 1.9 million
• Rio Tinto says producing iron ore at full tilt
• Vale reduces 2015 iron ore output target 10% to 469 million metric tons, as demand in China is expected to slow; but this compares with expected output in 2011 of 301 million
• Vale’s share price jumps by the most in 10 months on its $3 billion share buy-back plan
• BHP may add to its $23 billion in share buy-backs as profits surge to a new record
• Gindalbie may need to seek a share issue to fund cost over-runs in its Australia iron ore project; it looks like it will also need additional trade investors in its associated port and rail facility at Oakajee
• Australia commodity index reaches new high in June, says RBA
• China mining companies are mixing it up in M&Q
• Sundance draws up short-list of partners for its $4.6 billion iron ore project in West Africa; but Nippon Steel reported as not involved
• Iron ore producer, China Hanking, delays $250 million IPO in Hong Kong due to equity market turbulence
• JFE and Itochu are to increase stakes in Brazil iron ore mine
• Russia’s OMK seeks to invest in US steel mills, iron ore and coal – and “direct reduced” iron (which is iron ore that can be used to produce steel without coking coal)
• Scrapping of ships rises to new record level; but this does little to help shipping rates
Being away, though, meant digesting a week’s cooking of iron and steel news on my return. Here the aroma was mostly pleasant, albeit there was also the odd, less pleasant waft knocking about. For example, China’s average daily output of steel remained comfortably above 1.9 million tonnes per day for the middle 10 days or so of June. However Custeel.com also pointed out in the period 11 through 20 June, it fell 0.67% (to 1.955 million tonnes) from the previous 10 days. Power rationing and slower summer demand prompted some factories to cut output. The China Iron & Steel Industry Association has also sounded a cautious short-term note driven by rising energy prices and tighter monetary policies. Nonetheless, its forecast that steel demand in China may rise by as much as a quarter between 2010 and 2015 remains intact.
Elsewhere, global iron ore’s number two chef, Rio Tinto, said there is no sign of demand for iron ore slipping and it is serving up as much as possible, with demand strong in China as well as Japan, Korea and Taiwan. “We are producing flat out” said Rio’s Iron Ore CEO Sam Walsh, adding that there are healthy queues at its Western Australia iron ore ports.
Number one chef, Vale, is, however, reported to be less bullish about the prospects for iron ore; albeit this needs to be kept in context. Sure, its new CEO has reduced the Company’s 2015 iron ore eating target by 10% to 469 million metric tons, as demand in China is expected to slow. But this compares with expected output this year of 301 million (up 1% year on year). Vale has also announced that it will buy back as much as $3 billion of its shares over the next half year; with iron ore prices where they are, it can afford to do so.
Not to be out done, number three in the kitchen (but number one overall), BHP Billiton, may add to the almost $23 billion it has spent since 2004 buying back stock. The Company reported on Thursday that it had completed a $10 billion share buyback, six months ahead of schedule. Spending that amount again would still leave scope for a $65 billion acquisition in the second half without “excessive” stress according to Liberum Capital.
Also hot is the Reserve Bank of Australia. It’s index of commodity prices rose 1.3% in June to a new all-time high of 149.8, on the back of rising contract prices for iron ore and coal (2008 saw the previous peak at just 119.5). This is a good job, too, for Gindalbie Metals which may need a speedy share issue and additional trade funding for both its new iron ore project at Karara in Western Australia ($2.7 billion) and the associated Oakajee port/rail facility (now put at $5.8 billion). Once more, the Chinese are reported to be at the table (Angang Steel) as is Murchison Metals, whose share price has fallen sharply as a result.
China’s mining companies have also put M&A back on the menu after a short break. This suggests that the Sector still has the appetite and the funds for overseas acquisitions, even as the Government’s tightens. According to Ernst & Young, M&A deals involving Chinese mining companies increased from $2.1 billion at the end of March to $5.3 billion at the end of May. It also expects M&A activity to accelerate further, outpacing 2010 by 15-25%. “In some ways there is still this requirement for resource security whether or not China is going to have a soft landing”. This includes interest in Sundance Resources’ $4.6 billion iron ore appetiser in West Africa (35 million tonnes per annum from 2014) to which new investors are being invited; thereby joining its largest shareholder (with 19%), the privately-owned Sichuan Hanlong Group.
That said China Hanking, an iron ore producer, has postponed a planned IPO of up to $254 million in Hong Kong due to difficult equity market indigestion.
More enthusiastic is Russia’s United Metallurgical Company (aka OMK) which plans to table some $4 billion of project investment. This includes a new dish (at least to me) called “direct- reduced” iron, a refined form of iron ore which can be used to produce steel without adding coking coal.
Finally, we have the mixed feast of shipping rates: those chartering ships for iron ore and coal transport are doing very well indeed, thank you; while the ship owners are starving. For example, capesize charter rates have sunk 50% in a year and even a record level of ship scrapping (48 this year says Clarkson) has failed to revive them because 117 new vessels have been launched this year. “One man’s meat is another man’s poison”, as Lucretius, the ancient Roman cook said.
HEADLINES
• China’s daily output of crude steel shows a dip in mid-June, due to power rationing and slower summer demand; but tonnage remains above 1.9 million
• Rio Tinto says producing iron ore at full tilt
• Vale reduces 2015 iron ore output target 10% to 469 million metric tons, as demand in China is expected to slow; but this compares with expected output in 2011 of 301 million
• Vale’s share price jumps by the most in 10 months on its $3 billion share buy-back plan
• BHP may add to its $23 billion in share buy-backs as profits surge to a new record
• Gindalbie may need to seek a share issue to fund cost over-runs in its Australia iron ore project; it looks like it will also need additional trade investors in its associated port and rail facility at Oakajee
• Australia commodity index reaches new high in June, says RBA
• China mining companies are mixing it up in M&Q
• Sundance draws up short-list of partners for its $4.6 billion iron ore project in West Africa; but Nippon Steel reported as not involved
• Iron ore producer, China Hanking, delays $250 million IPO in Hong Kong due to equity market turbulence
• JFE and Itochu are to increase stakes in Brazil iron ore mine
• Russia’s OMK seeks to invest in US steel mills, iron ore and coal – and “direct reduced” iron (which is iron ore that can be used to produce steel without coking coal)
• Scrapping of ships rises to new record level; but this does little to help shipping rates
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