China News

Iron & steel weekly: 800 million

2011-09-05T10:10:00.000-07:00

This is the amount in tonnes of additional iron ore that the World needs through 2019, according to the number two player Rio Tinto – which neatly breaks down to an average 100 million per annum for eight years; and I certainly hope so. Good job then (and not talking its own book at all) that Rio’s Simandou iron ore project in Guinea is on track to make its first shipment by mid-2015. Note, too, that this is a joint venture with Chinalco, aka the Aluminium Corporation of China.

- Non-traditional
In case you had forgotten, China is the World’s largest iron ore consumer and, it follows, the number one national in steel. This means, too, that it must source product from both traditional (Australia, Brazil and South Africa) and non-traditional sources (everywhere else, including Guinea).

For the record, too, (the wonderfully named) Xu Xu emphasised this at a recent conference. He is Chairman of - wait for it – ‘the China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters’ and said that in H1 2011 iron ore imports from countries other than Australia, Brazil, India and South Africa reached 64.63 million tonnes. This is 19.3% of total imports and up some 4% from a year ago. Xu also went on to say that this rising share indicates that the traditional position of Australian and Brazilian miners, in particular, is being challenged.

Furthermore, China continues to look more at the likes of Peru, Chile and Canada where it should actively develop strategic relationships with iron ore exporters, he said. The same goes for Russia, Vietnam and Kazakhstan. Xu added, that the proportion of Indian ore imports to China reduced by almost 15% in H1 - the largest proportional decline in 13 years. Domestic constraints on mining are a factor here. Nor should China’s domestic iron ore production be forgotten and, in the first seven months to end July, it rose 22% to 691.9 million tons.

- August prices rise
Whether traditional or not, the price of iron ore imports continues to ignore what is happening in World bourses - and tonnage for August delivery rose to the highest level since 6 May ($191.90), according to The Steel Index. This means that 62% iron ore fines ended the month at $179.9 per ton in Tianjin.

Similarly, trading in iron ore swaps climbed 50% to a record in August, according to The Steel Index. Investors bought and sold derivatives corresponding to more than 6.5 million metric tons, up from 4.3 million in July, and worth a nominal value of $1.1 billion. Meantime, in the period January to July, says CISA (the China Iron & Steel Association), the average price of iron ore imports gained 37.8% to $162.7 per metric ton. Unsurprisingly, too, this added Yuan 137 billion in costs to the Chinese steel industry.

- Steel margins
In turn, the profit margin of 77 large and medium Chinese steelmakers was just 3.08% in the first seven months of this year, down 0.1% from a year earlier, added CISA. It also described steel making as a high cost, low profit sector compared with the industry in general where the average profit margin is 5%.

However, for his part, Baosteel’s General Manager, Ma Guoqiang Ma says that the Sector was still facing risks from the growing “financialisation” of iron ore prices and the Company is still looking to resolve the monopoly of supply by investing in overseas iron ore mines at a proper time. He also expected little opportunity for steel prices to rise or fall significantly in Q4 - due to still high iron ore prices and the lack of remarkable growth in steel demand.

- CISA's iron ore price index
In order to keep better track of raw material prices, though, CISA will begin publishing a weekly iron ore index on 1 October. “We are able to collect data from all domestic mines and 35 ports nationwide” said Luo Bingsheng, Deputy Party Secretary of the Association, which represents China’s 77 biggest mills. He was speaking at a conference. Quarterly iron ore prices are usually based on figures derived by deducting freight costs from the three month average of daily iron ore indices compiled by Platts, The Steel Index and Metal Bulletin with a one month lag period.

Steelmakers, including Baoshan, China’s largest listed producer, typically use Platts. “It isn’t mandatory for steelmakers to replace other price indicators” said Luo. “But an index launched by the steel association will be well received by its members”. Nonetheless, the Association’s index, which will consist of domestic and import prices, will “more truthfully reflect China’s market reality and guide orderly imports”, added CISA Vice Chairman Zhang Changfu.

- Partnerships
One way to ameliorate the situation is to work together and the World’s number one in steel, ArcelorMittal and Hunan Valin, China’s number 10 producer, will accelerate a strategic partnership for the production of high end steel products in China plus a target lowering of HV’s costs and an initiative on better purchasing of its iron ore. The two will also push ahead with new auto sheet and electrical steel projects. For good measure, too, AM owns a touch under 30% of HV, which is listed in Shenzhen and is 40.01% by Hunan Valin Group. This latest announcement also comes very quickly after CISA and the local securities regulator in Hunan said that AM had failed to fulfil its commitments to HV. In addition, AM agreed to sell its 12% stake in an auto sheet joint venture with Baosteel and Nippon Steel to the Japanese firm so as to be free to focus on its work with HV.

- Shipping bottom
In the less good news department, Lorenzten & Stemoco says that the slump in dry bulk shipping rates may have ended. This comes after Rio Tinto paid the year’s highest rent ($10.30 per metric ton) for a capesize vessel to carry iron ore to China from Australia. Indeed, the rate paid is 31% more than on 2 August, says the Baltic Exchange and is the highest since 11 November. Furthermore, the number of contracts used to hedge capesize rents for Q4 of this year has jumped 42% since end August and forward freight agreements, by value, have added as much as 13% (to $18,925 per day), according to Clarkson.

Similarly, US investment bank, Dahlman Rose, says that hire costs of capesize ships will rise by a further 25% as exports from Brazil to China drive prices up. That said, trading in freight derivatives, used to bet on the cost of shipping raw materials such as coal and iron ore, fell 13% last week to 27,318 from a 19 month high according to Oslo-based NOS Clearing, Singapore-based SGX AsiaClear and London’s LCH.Clearnet.

The global steel industry is the single most important customer of dry bulk shipping, with iron ore, coking coal and steel products accounting for 51% of seaborne trade, estimated at 3.56 billion metric tons for 2011, according to DVB Bank. What is more, a total of 1,267 capesize ships comprise 40%, by number, of the global dry bulk fleet of 8,603 vessels, according to Clarkson. But too many new ships were ordered when rates boomed and this depressed hire rates; and, while there has been some recovery, Bank of America Merrill Lynch says that demand is unlikely to catch up with supply until 2014.

However, iron ore shipments booked in capesize vessels tracked by Clarkson reached the highest monthly tally of this year in August at 76, which compares with 58 in July, and 71 in June. For the record, too, some 70% of the forecast exports of 1 billion tons of iron ore in 2011 will be shipped from Brazil and Australia, according to Clarkson.

- Valemax
The World’s largest exporter of iron ore is in talks with Chinese shipping companies to operate its new, massive iron ore carriers under long term contracts as they run from Brazil to China. However, China’s largest shipping companies are lobbying the Government to stop Vale and its plan to build a $2.3 billion fleet of the World’s largest carriers. Similarly, Chinese regulators have not yet approved any of its ports to harbour more than 300,000 dead weight tons for dry bulk carriers because of safety and environmental concerns; Valemax’s weigh in with a gargantuan capacity of some 400,000.

- Brazil, Afghanistan, Nigeria and Cockatoo Island
Brazil’s iron ore shipments in August reached the highest level (32.5 million metric tons) in more than three years and are up by 8.9% on the same month last year.

In the same country, a Chinese consortium (including Baosteel and CITIC) has bid $1.95 billion for a 15% stake in global leader in niobium. Companhia Brasileira de Metalurgia e Mineracao has an 82% share of the global market for niobium which is one of the five major refractory metals (with high resistance to heat and wear). It is used with iron and other elements in stainless steel alloys and also with a variety of nonferrous metals, such as zirconium. Niobium alloys are strong and are often used in pipeline construction, jet engines and heat resistant equipment. Niobium is also used for jewellery and, at cryogenic temperatures, is a superconductor. Posco, Nippon Steel and others hold another 15%.

Meantime, in Afghanistan, the Steel Authority of India and JSW Steel are among seven Indian steel and mining companies which are bidding jointly for the Hajigak iron ore mines, it is reported. Reserves here may be as large as two billion metric tons of iron ore with a capital budget of some $3 billion over 30 years.

Then, down in Nigeria, Reuters says significant production should begin at the Itakpe iron ore deposits next year. Reserves are reported to be three billion metric tons with an initial annual output target of two million tons.

Not forgetting Cockatoo Island (“only in Australia”), where Pluton Resources has signed a deal with US-based Cliff Resources and its joint local partner to acquire these iron ore assets in the Kimberly region of Western Australia. The consideration is reported to be that Pluton will assume liabilities for environmental rehabilitation of the island. At this time, production is said to be approximately 1.4 million tons of high grade iron ore fines per annum.

- Chapter 11
Finally, Iron Mining Group Inc has filed for reorganisation relief under Chapter 11 in New York due to a dispute with its senior secured lender, Globe Speciality Metals. That said, its foreign subsidiaries continue to conduct business as usual and have contracts to export 480,000 million tonnes of iron ore by the end of 2011. IMG is a global iron ore trading group with direct mining operations in Chile and Mexico, where it owns a number of iron ore projects in various stages of development. China is its prime destination focus as the Nation looks to non-traditional sources.

Iron & steel weekly: BHP and other stories

2011-08-31T00:36:00.000-07:00

Bestriding the week like the colossus that it is, BHP produced a sparking set of full year figures - with net profit up 86% to almost $23 billion and a margin of 33%. In the supporting cast (of thousands), the Chinese steel industry showed it was no slouch either and daily production rose further (okay by just 0.26%) in the second 10 days of the month (CISA’s choice) just as it did in the first (+0.4%). In fact, in the 23 ‘official’ 10 day trading periods of 2011, daily production has risen on 15 occasions. In the latest period, too, the key driver was the expectation of stronger demand from construction in the autumn.

Elsewhere, iron ore prices continue to ignore the World’s economic travails and, last seen were up a touch at $177.9 delivered in China (on 23 August) said Steel Index. Similarly, BHP noted that the spot price for iron ore is trading at close to $178 per tonne, which is not far off the record $191.90 touched in mid-February; and nearly triple the price in late 2008, thanks to booming Chinese demand. The Group also added that it continues to favour long term iron ore supply contracts in its trading.

But this has not done any favours for the profits of China’s listed steelmakers and when 27 of them released their H1 results on Monday, after the market had closed, their combined net profit showed a slump of 16% year-on-year to Yuan 9.98 billion ($1.56 billion), according to Wind Information. And, 16 of them reported lower profit margins. Similarly, Mysteel said “the steel industry will continue to suffer great pressure during the second half of this year”. Not that this stopped, Baosteel taking 51% of middle-sized steelmaker Shaoguan Steel in Guangdong province as part of the Country’s steel restructuring plan. Okay, it was a free transfer on this occasion.

Elsewhere, Taiwan’s China Steel will raise prices 1% in October/November, while capesize freight rates have risen 26% since 1 July as Japan rebuilds. Meantime, in India, Sesa Goa continues to be restrained by Indian Government iron ore mining restrictions, while in Canada the Quebec Government has announced an $80 billion regional development plan focused on attracting Japanese and Chinese natural resource investors to the region.

Further south, USIM, Brazil’s number two steelmaker is looking to quadruple its iron ore production, and would very much like to win the auction for a new $1 billion port terminal to be built in Rio de Janeiro State. Then, moving east, South Africa’s Assore has doubled its 2011 net profit to $440 million, principally on iron ore.

Down under in Australia, Peabody Energy and ArcelorMittal have increased their joint takeover offer for Macarthur Coal by 3% to A$4.9 billion ($5.2 billion) - and it has been accepted. Macarthur is the World’s largest producer of pulverised coal which is used as a replacement for coke in the production of pig iron. Note, however, that Citic Resources, which owns 24.5 % of Macarthur, has made no comment thus far. However, the offer from P/AM only needs 50.1 % of acceptances.

Finally a lot seems to be happening in Russia where its largest steelmaker, Severstal, has just reported that Q2 net profit had more than tripled from $192 to 602 million; it also enjoyed a 47% EBITDA margin. Steel makers in Russia, the World’s fifth largest producer, are benefiting from being low cost producers, but the vertically integrated companies are showing the greatest year-on-year improvement. For example, MMK, Russia’s third largest producer, saw its Q2 net profit fall from $53 to 13 million.

In addition, IRC, a Hong Kong-listed iron ore company mining in Russia, posted its first ever profit after commencing sales from its Kuranakh mine; prices were also higher. Net income for the six months ended 30 June was $3.6 million, compared with a loss of $51.9 million a year earlier. Revenue, meantime, increased to $60.4 million from $5.2 million a year earlier.

And last but not least, Fleming Family & Partners, a UK private equity firm, may invest $2 billion to develop iron ore deposits in the Chelyabinsk region of Russia.

“The finest steel has to go through the hottest fire”
- John N. Mitchell

DETAIL

- China’s daily steel output increases slightly (+0.26%) in the 10 days ending 20 August, says CISA
China’s daily crude steel output stood at 1.947 million tonnes in the period from 11 to 20 August, which is an increase of 0.26% from the previous 10 days, as plants plan to take advantage of an expected revival in demand in the autumn, says the China Iron and Steel Association. This is also the second consecutive ten day period in which it has done so. And, in the year to date there have been 23 ‘official’ 10 days trading periods and on 15 occasions daily production rose.

"China’s overall investment in construction projects has remained aggressive this year which is the driver behind steel production” said Smart Timing Steel. It is also the case that steel mills benefited from a robust level of construction actvity even during the summer, when it normally slows down i.e. daily steel output has remained close to the record of more than 2 million tonnes set in the last 10 days of June. Similarly, daily steel output has stayed above 1.9 million tonnes since February, up from an average of about 1.7 million tonnes last year. “The next two months are normally the last opportunity for large sales for steel mills as demand traditionally picks up and pushes prices higher” said Anshan Iron & Steel. In addition, China's major steel companies have all raised main product prices for September sales.

- China steelmakers’ profits weaken as iron ore prices rise
China’s steelmakers saw their profits sharply reduced by higher iron ore prices in the first half of 2011. For example, 27 listed Chinese steel producers released their H1 results on Monday, after hours. Their combined net profit slumped 15.7% year-on-year to Yuan 9.98 billion ($1.56 billion), according to Wind Information. And, of the 27 listed steel companies, 16 reported lower margins.

In the first half of 2011, China imported 334 million metric tons of iron ore, 8.1% more than a year ago, says the NBS. And, the average price rose by 42.4% year-on-year to $161 per metric ton.

Meantime, China’s steel output grew by 9.6% year-on-year in H1 to 350 million metric tons, but the industry’s profit margins dropped to 2.42% in the first five months, the lowest in many years, according to the Ministry of Industry and Information Technology (MIIT). It attributed this weaker profitability to rising iron ore prices.

Similarly, Mysteel said “the steel industry will continue to suffer great pressure during the second half of this year”.

This included China’s largest listed steelmaker, Baosteel, which saw net profits fall 37% to Yuan 5.08 billion ($796 million). It was particularly affected by lower demand from the auto industry. Q3 profits are also expected, by the market, to be lower.

- Baosteel acquires 51% of Shaoguan Steel
Baosteel Group will take a 51% stake in a middle-sized steelmaker Shaoguan Steel in Guangdong province as part of the Country’s steel restructuring plan. The free transfer of the stake is still subject to approval from State Assets Regulator.

Baosteel Group, the second largest manufacturer by output, agreed to set up a joint venture named Guangdong Steel Group in mid-2008. It controlled 80% with Guangzhou Steel, while Shaoguan owned 20%. Guangzhou Steel and Shaoguan Steel, both owned by the Guangdong provincial government, will also withdraw their stakes from Guangdong Steel Group.

- Taiwan’s China Steel raises October and November prices by an average 1%
Taiwan’s largest steel producer has said that it will raise domestic prices for October and November by an average 1% from September, principally due to higher commodity prices.

- Shipping rates rise as Japan rebuilds; with capesize up 26% since 1 July
Shipping rates for dry bulk vessels are being boosted by rebuilding efforts after the Japanese earthquake and tsunami increased imports of iron ore and coal since July, according to Lorentzen & Stemoco. “From our perspective, the market is better positioned for a recovery now than at any time during the last three years”.

Hire costs for capesize vessels have risen 26% since 1 July, adds the Baltic Exchange. Similarly, through 24 August, it notes that the cost to hire capesize vessels (which haul iron ore and coal) have climbed for 11 consecutive day to the highest level this year. For example, average daily capesize rents hit $19,010 last week, the most expensive since 24 December. Rents for the ships - which account for 40% of dry bulk fleet capacity - have rallied this month as higher commodity exports helped relieve a vessel glut. The surplus caused average rents to collapse to the lowest level since 2002 in Q1 and Q2 of this year.

However, trading in forward freight agreements, used to hedge the cost of shipping dry bulk commodities by sea, suggests rates may be peaking, according to RS Platou Markets. For example, October-to-December capesize contracts last week were trading at $14,500 to 14,700 per day.

That said, some spot voyage prices for capesize have soared to over $40,000 in recent days as, says Dahlman Rose, the cost of iron ore produced in China was higher than imports for the first time in the current year.

- BHP Billiton sees 2010-11 net profit rise 86% to $23.6 billion
The World’s largest mining company’s annual net profit rose 86% to $23.6 billion on the back of dramatically higher prices for iron ore and copper; market expectations were clustered around $22 billion. Revenue, meantime, for the year was up 35.9% to $71.7 billion which meant a spectacular lift in margins from 24.1 to 32.9%.

BHP said the strong performance was the result of rising prices for its key commodities which reflected high levels of demand from emerging markets such as China - and tight supply. BHP also said that it expects “robust demand” in the short and medium term, but warned that cost pressures could hurt its earnings further out.

The Company added that it expected weak growth in Europe and the US. That said, recent turbulence had not significantly dented demand overall and the Company said it continued to see a strong outlook longer term, underpinned by emerging market demand and barriers to the expansion of supply as miners are hit by funding constraints and labour and equipment shortages.

“The junior (producers) will once again not bring on the volume growth that is being fed into analyst forecasts”, said CEO Marius Kloppers. The constraints squeezing these junior suppliers are likely to prompt deals, but BHP will focus on base metals, oil and gas and potash - sectors where any deals are less likely to face regulatory hurdles. “The balance sheet has capacity for sizeable acquisitions. Opportunity has always been the limiting factor”.

Turning to costs, BHP said labour and equipment increases cut earnings by $1.2 billion in the year to June. Nor did currency help and the weakness of the US dollar against the Australian dollar, together with inflation, took a $3.2 billion bite out of full year operating profit. That said, BHP said it was “congenitally” opposed to currency hedging. “The prices rises that we have seen on the revenue side lag between six and 12 months, and we were going to see them on the cost side in due course”.

Costs excluding inflation and currency movements rose 5% in the year to June, compared with zero growth the year before. However, Kloppers declined to give a forecast for 2012, although they are expected to increase.

Nonetheless, “we remain positive on the longer term outlook for the global economy. Over the past decade, emerging economies have contributed more to global growth than the developed world and we expect their share to expand as the process of urbanisation and industrialisation continues”.

- BHP says it will stay with long term contracts for iron ore
Turning to iron ore, the World’s number three supplier said it was linking the majority of its sales to monthly average spot prices but continued to negotiate long term contracts for supply volumes. This after, it led a drive in 2010 to disband a 40 year old system of pricing iron ore once a year - in the face of opposition from customers in China. Kloppers also said that on a FOB basis, BHP’s sales were running “very close” to record high prices. Note, too, that iron ore is its largest division and income here last year soared by 122% to $13.3 billion.

- Sesa Goa says Indian iron ore mining has impacted performance
Sesa Goa, which is owned by Vedanta, has said that its performance will be affected by an order from India’s Supreme Court extending a ban on mining to two more districts of the key iron ore producing regions of Tumkur and Chitradurga in the southern Indian state of Karnataka. The two account for some 7% of India's estimated 213 million tonnes of annual iron ore output and the ban could impact exports from the World’s third largest supplier.

- Quebec seeks to attract Japan and China to invest in $80 billion regional plan
Companies from Japan and China are considering investing in an $80 billion regional development plan - “Plan Nord” - in Canada’s resource-rich Quebec province, said Premier Jean Charest; with the focus on iron ore, rare earths and lithium deposits, as well as in infrastructure. Xstrata (nickel) ArcelorMittal (iron ore) are already there and the Chinese are reported to be “very interested” in iron ore (and the CICC has an office in Toronto).

ArcelorMittal is also on record (May 20) as saying that it will spend $2.1 billion to expand its Quebec iron ore facility and Xstrata, earlier this month, said it would invest a further $510 million in its nickel mine in the Province.

Quebec has also set aside $500 million (over the next five years) to purchase equity in new mining projects; but would not seek controlling holdings.

- USIM intends to bid for new Brazilian port site as it aims to quadruple iron ore output
Usinas Siderurgicas de Minas Gerais (USIM), Brazil’s number two steelmaker is looking to quadruple its iron ore production, and would very much like to win the auction for the site of a proposed $1 billion port terminal in Rio de Janeiro state.

The State government will ask for bids later this year for a lease on the so-called Area do Meio, which covers some 245,400 square metres, from companies which plan to ship the ore, Brazil’s largest export. At this time, too, USIM does not own a dedicated iron ore port facility. And, the capacity of Area do Meio will initially be 25 million metric tons per year, with capacity to expand to 44 million. Other bidders may include CSN, the third largest Brazilian steelmaker and MMX Mineracao & Metalicos.

Brazil, the second largest exporter after Australia, will boost its output to 771.5 million metric tons in 2015 from 372 million in 2010, according to estimates from the Brazilian Mining Institute. Last year, some 84% of Brazil’s iron ore output was exported for a total of $29 billion, with China buying 45% of it.

USIM's mining unit, Mineracao Usiminas, controls four mines in the Serra Azul region of Minas Gerais; and Sumitomo bought 30% of the unit for $1.93 billion last year. USIM exported 526,000 metric tons of iron ore in 2010, less than 8% of its total production, through a terminal in Itaguai operated by CSN and next to the Area do Meio. It is also reported that USIM may team up with ArcelorMittal.

Note, too, that USIM is 27.8% (voting shares) owned by Nippon Steel; and during 2011, CSN has built up a stake of some 10% in its domestic rival.

- South Africa’s Assore doubles net profit to $440 million
The South African miner said that net profit for fiscal 2011 more than doubled to Rand 3.2 billion ($440 million) on increased demand and higher prices. Sales, meantime, rose 48% to Rand 11.2 billion which meant a first class shift in profitability from 19.8 to 28.6%.

Assore, with partners, spent Rand 2.8 billion to develop infrastructure at the Khumani Iron Ore Mine which should allow the production of 16 million metric tons per year by mid-2012, up from 10 million tons now. It also said that demand in the iron ore market is tight.

In addition, Assore mines manganese and chrome as well as producing ferroalloys for the steel industry; and it expects challenging conditions for the first two.

- Macarthur Coal backs sweetened joint Peabody and ArcelorMittal bid
Peabody Energy and ArcelorMittal have increased their joint takeover bid for Macarthur Coal by 3% to A$4.9 billion ($5.2 billion) and, thus, have secured the backing of the Australian miner for the offer after rivals failed to emerge. Macarthur is the World’s largest producer of pulverised coal; it has also fought off four takeover attempts over the past three years. For the record, PCI - pulverised coal injection - is used as a replacement for coke in the production of pig iron.

Note, too, that Citic Resources, which owns 24.5 % of Macarthur, has made no comment thus far. However, the offer from P/AM only needs 50.1 % of acceptances.

- Severstal triples Q2 net profits and leaves rivals behind
Russia’s largest steelmaker has reported that Q2 net profit more than tripled from $192 to 602 million, driven by strong mining assets and recent divestments (including the Sparrows Point mill in the US). The Company, controlled by billionaire CEO Alexei Mordashov, is benefiting from a vertically integrated structure in coking coal and iron ore, where prices have soared. In fact, the mining unit generated a 47% EBITDA margin.

Magnitogorsk Iron & Steel Works (aka MMK), Russia’s third largest producer, also reported on Friday and its Q2 net profit fell from $53 to 13 million, down from $53 million last year. A day earlier, Novolipetsk Steel, Russia’s number four, reported Q2 net profit up 28% at $587 million. Unlike Severstal, however, both NLMK and MMK must purchase some of their coking coal and iron ore supplies on the open market.

Both Severstal and MMK sent out some positive signals about pricing in the steel market going forward. For example, Severstal CFO Alexei Kulichenko said that prices very likely bottomed in the current quarter. “After that (May) prices actually went down significantly, and from June, July and I would say August, were on what we believe was the bottom level”. Severstal also said that in Russia, its largest single market, “real steel demand in Q3 is expected to remain firm across all steel consuming sectors due to a recovery in fixed capital investments and seasonally increased construction activity”. MMK, meantime, said it expects “positive momentum to recover in H2 2011 with respect to both demand and steel prices”.

- IRC reports its first ever profit as iron ore sales commence from Russian facility
IRC, a Hong Kong-listed iron ore company mining in Russia, reported its first ever profit after its first sales from the Kuranakh mine; prices also rose.

Net income for the six months ended 30 June was $3.6 million, compared with a loss of $51.9 million a year earlier; while revenue increased to $60.4 million from $5.2 million.

IRC began sales from the Kuranakh project, which ships iron ore to China, in the second half of last year. IRC plans to produce 750,000 metric tons of iron ore concentrate this year, with 400,000 tons of that to be mined in the second half of the year. IRC’s average realised iron ore concentrate price rose 12% in the first six months.

- Fleming Family may invest $2 billion in Russian iron ore
It is reported that Fleming Family & Partners, a UK private equity firm, may invest $2 billion to develop iron ore deposits in the Chelyabinsk region of Russia.

“The Grand Old Duke of York……

2011-08-26T03:40:00.000-07:00

……he had ten thousand men.
He marched them up to the top of the hill and he marched them down again.
And when they were up, they were up; and when they were down, they were down.
And when they were only half-way up, they were neither up nor down".

The above is a celebrated English children’s nursery rhyme, whose lyrics have become proverbial for futile action. It was also often performed on stage with the audience being asked to play out the verses and even call out “up” or “down”; the actor’s intent, of course, to catch people out.

So it is with the Shanghai Composite (SCI) which - in the first 20 trading days of August - has gone up on eight and tramped down 11 (including today). Make your mind up!

Okay there was a modicum of optimism today when it was announced that Shaanxi Coal Industry is to IPO in Shanghai with the aim of raising up to Yuan 17.3 billion ($2.7 billion) in what could be China’s largest IPO this year. The China Securities Regulatory Commission (CSRC) will look at it on Monday (which is also my birthday). Shaanxi would be China’s third largest listed coal miner. This meant that the SCI closed the week 3.1% to the good having been down 2.3% the one before.

It may also be that the central authorities are in an easier frame of mind and the official China Securities Journal said as much on Wednesday. And this was reflected in the money market today, too, when the seven day repurchase rate fell 42 basis points to 4.0709% (the last time I looked); whereas on Tuesday it was 5.2%.

The Yuan continues to be firm, too, and, finally, moved up a tad at the close today from 6.39 to 6.3868. There are, however, divergent views about where it goes from here (and 12 Month Yuan Forwards are at a fence-sitting 1.62% premium). My view is that the Yuan will continue to rise and that its new record of 6.3820 will be soon tested. This is especially true, given that China may need to wait until September’s CPI, to see an actual dip in the rate of inflation. Similarly, Finance Minister, Xie Xuren reiterated yesterday that stable prices remain the top priority for the Chinese Government, but that any policy moves must avoid hurting economic growth. He also said that China will step up its efforts to rein in local government debt.

‘The Disciples of the Soft Landing’ continue to multiply as well and, earlier this week, a preliminary estimate for August manufacturing output said it was moderating but not collapsing. This originated from HSBC/Markit Economics and their manufacturing index which inched up to 49.8 from a final July reading of 49.3 (the first time below 50 in a year; indicating contraction). HSBC also said that the slide in the index in July may have been a one-off “blip”. Note, too, that the official manufacturing index for July from the NBS and the China Federation of Logistics and Purchasing was 50.7.

Furthermore, HSBC believes a PMI reading of as low as 48 in China still points to annual growth of 12-13% in industrial output and a 9% expansion in GDP, even if it indicates a contraction in factory activity on the month to month basis. For the record, in July, the flash reading was 48.9, compared with the final reading of 49.3 and these preliminary indices are based on 85 to 90% of responses to a survey of executives in more than 400 companies.The final August number is due out on 1 September.

Elsewhere, a number of global banks have been tinkering with their GDP forecasts for China and the consensus of the four below for the current year is now around 9.0% (having been 9.2%). Similarly, in 2012, the number is now around 8.4% which is 0.5% adrift of previous expectations.

Bank 2011 and 2012
% New (Old) New (Old)
Citi: for 2011 only 9.0 (9.2)
UBS: 9.0 (9.3) and 8.3 (9.0)
MS: for 2012 only 8.7 (9.0)
DB: 8.9 (9.1) and 8.3 (8.6)
Notes: MS is Morgan Stanley; DB is Deutsche Bank

It is also worth noting that Citi does not expect an interest rate hike this year but does see faster Yuan appreciation. Meantime, UBS says that its forecast changes reflect weaker growth prospects in developed economies (and thus exports) and that the PBOC may relax policy if the economy falters. In fact in 2012, UBS says that export growth may be as low as 5.5% which compares with a previous forecast of 12% and net exports could deduct around one percentage point from China’s GDP growth in 2012. The Swiss bank also says that the PBOC is likely to keep interest rates on hold for now and could opt to ease policy if exports, investment, and industrial production slow sharply.

UBS has also cut its inflation outlook for China from 5.3 to 5.2% in 2011 and from 4.0 to 3.5% in 2012.

For its part, Morgan Stanley says that the evolution of China’s economic growth in 2012 is important slowing from 9.7% in Q1 to 8.1% in Q4. Similarly, Deutsche says that the chance of China’s economic expansion slowing to 7% has jumped from 5 to 15%. Finally, RBS adds (a little more positively) that if growth in the US falls to zero this year, China’s GDP growth will probably decline, on a full year basis, by only 60 basis points. “So, growth will still be between the 8.5 and 9.0% range”.

And the last word, comes from Nomura, whose technical boffins say that China’s stocks are approaching oversold levels. This after the Shanghai Composite had fallen 17.4% from this year’s 18 April peak (on 8, 9 and 22 August); it is now off 14.6% on the same basis. “China is on track for a soft landing despite the external risks, with accelerating inland growth and investment in public housing and new projects”.

“To climb steep hills requires slow pace at first” – Shakespeare

SHANGHAI COMPOSITE:
Today: -0.12% to 2,612.19 at close
This week: +3.07%
Last week: -2.27%
August: -3.3%
YTD: -7.0%
Year ago: -0.3%

HANG SENG:
Today: +0.38% to 20,289.03 at close
This week: +3.41%
Last week: -6.33%
August: -9.6%
YTD: -11.9%
Year ago: -4.0%

OIL: $84.91
GOLD: $1786.40
(immediate delivery/intra-day high of $1,917.90 on 23 August 2011)
EURO/$: 1.4426

Iron & steel weekly: “keep calm and carry on”

2011-08-22T03:53:00.000-07:00

This was the strap line on a poster produced by the British government in 1939 at the beginning of WW2. It was intended to raise morale, but in the event was little used. It has, however, had a new lease of life in more recent years; and still means the same.

Okay, you can’t ignore the background noise of possible economic calamity and equity market routs; or gold at $1894.80 (at the time of writing). Nonetheless, given the news flow in the iron and steel sectors, there has also been a remarkable insouciance.

For example, Macquarie says that because of demand in China, iron ore supply won’t keep up with it – even with zero growth in Europe and North America. Similarly, CISA says steel demand in China is expected to remain robust; it also says that while China only owns some 10% of its imported iron ore at this time – it should be 50% in five to 10 years.

Following on from Baoshan, China’s leading steel mills are also raising prices for September, which reflect both the spot market and expected demand levels. Fortescue Metals, Australia’s number three iron ore producer, produced a 77% rise in annual profits (to $1.02 billion) and said it was confident about long term demand in China; it sells most of its product here. That said, it did admit that tighter credit conditions have slowed orders a bit.

Meantime, in South Africa, Kumba and Sishen (74% owned) are embroiled in a legal dispute over the ownership of a disputed mining licence which used to belong to ArcelorMittal but is now in the hands of ICT, which has indirect links to South Africa’s President. This is an iron ore soap opera.

Exxaro Resources (which owns 20% of Sishen) has also produced figures, this time for H1 in which it saw net profits rise 33% to $445 million. Additionally, the Company said it would like to be more involved in directly-owned iron ore production; and would even consider raising equity to do so.

The World’s largest ferrochrome producer, ENRC, was another corporate which enjoyed a good first half (net profit up 29% to $1.17 billion) and it appears to be coming to grips with its corporate governance issues. The Company is also investing in iron ore assets and this product accounted for 43% of its EBITDA in H1. ENRC is also seeking to produce 19.5 million tons of iron ore by 2014 and 45 million tons by 2016.

Finally, keeping calm are African Minerals, Renova/East One, Cliff Resources and Anglesey Mining; while Magnitogorsk/Atop and Minmetals/Sinosteel are carrying on. See below.

“You better think about the future, for it's where you will spend the rest of your life” - Anon

- Iron ore demand in China exceeds supply (still)
Demand in China, the biggest consumer of metals, will keep iron ore markets in deficit this year and next year, even in the event of zero growth in Europe and North America, says Macquarie. Earlier, Wood Mackenzie is on record (last month) as saying that iron ore prices are set to stay at “elevated” levels until at least 2015 because of short supply. However, Citigroup has (as of last week) lowered its three month iron ore forecast to $160 per metric ton.

- CISA expects steel demand to remains strong
Steel demand in China is expected to remain robust as the World’s second largest economy aims to maintain strong growth boosted by its continued investment in urbanisation and industrialisation, according to the China Iron & Steel Association (CISA). “The engine driving up China’s economic growth will still be powerful due to rapid investment growth, which will support steel demand in the near future”. CISA also expects that China’s steel exports will continue to stay relatively high, supporting steel demand. China’s economy should grow 9.2% in Q3, slightly down from the first two quarters of the year, according to the NDRC, but still not bad at all.

Inventories of five main steel products: hot rolled coil; cold rolled coil; plate; wire rod; and rebar fell for the fourth straight month by 3.24% to 13.85 million tonnes in 26 major cities by end of July from the previous month.

“Large-scale construction of social housing and water conservancy as well as railway projects will continue to boost demand for construction steel products, while flat steel product mills will face growing competition as its end users including shipbuilding, auto and machinery see slower growth”.

Data also show that rebar spot prices rose 0.85% at the end of July from a month earlier. Meantime wire rod added 1.51% to its price and hot rolled coil +0.43%; albeit most other steel products fell modestly in the month. “Chinese steel mills will still face high production costs in the near future, narrowing the room for prices to fall in a large way”.

Prices of spot iron ore gained 1.5% in July from June, while coking coal prices jumped 2% from a month earlier.

China owns 10% of its imported; and this should be 50% in five to 10 years (CISA)
China currently owns less than 10% of its imported iron ore (618 million tonnes last year); and it should seek 50% from Chinese-invested overseas sources in the next five to 10 years, according to Li Xinchuang, Deputy Secretary-General of China Iron Steel Association (CISA). These comments were reported in the China Daily last month wherein Li said China would be able to break the hold of Rio, Vale and BHP on supply and pricing only if it can source half its overseas ore from Chinese-invested mines.

- More China steel mills raise September prices on demand
More of China’s leading steel mills have announced price rises for their main products for September in order to both catch up on the spot market and in anticipation of stronger demand next month. Fort example, Wuhan Iron & Steel and Beijing Shougang, will raise September prices for their main flat steel products in the wake of a similar move by Baosteel the week before; the latter is pretty much the domestic price leader.

“Price rises by steel mills reflect climbing prices in the spot market since the end of July as steel mills received strong bookings in August. Steel prices are expected to increase next month as traders and end users need to build up stocks as demand improves” said Timing Steel.

Wuhan Steel, the number three producer, plans to increase hot rolled coil prices by Yuan 100 per tonne and cold rolled by Yuan 120 per tonne; which is in line with Baosteel. Similarly, Shougang will lift cold rolled coil prices by Yuan 50 per tonne, but has yet to make a decision on hot rolled. Angang Steel is expected next.

- Fortescue CEO says tight credit conditions are slowing orders for iron ore in China; but the long term picture remains rosy
Fortescue Metals Group, Australia’s third largest producer of iron ore, said tighter credit conditions in China have slowed orders from steel mills; and this as it reported full year net profit up 76% to $1.02 billion. “While we’ve not had any impact on a month-to-month basis, we have seen perhaps a cooling off as you look forward in the market” said CEO Nev Power.

Nonetheless, the Company, which sells almost all of its ore to China, also expects iron ore markets to stay strong. “Looking at the next five years, the Chinese 12th Five Year Plan is still very intensive in steel consumption and demand” added David Liu, Fortescue’s Head of China Sales and Marketing. “So we still see underlying requirement for steel to remain very, very strong”.

Fortescue’s average price for iron ore in the fiscal year to 30 June rose 68% to $149 per ton.

- Kumba denies it has committed fraud over South Africa mining license application
Sishen Iron Ore Company, a 74% owned unit of Kumba Iron Ore, has denied committing fraud in its application for a disputed mining license which was awarded to a rival, Imperial Crown Trading (ICT).

“The submission that Sishen Iron Ore has admitted to fraud is quite frankly absurd” Chris Loxton, Kumba’s lawyer, told the North Gauteng High Court in Pretoria last week. However, Willie Vermeulen, the Department of Mineral Resources’ Senior Counsel has said that Sishen arranged with an official to date its rights application 1 May 2009, a day after it submitted the proposal. The date is significant as the 21.4% share that had been held by ArcelorMittal South Africa expired on 30 April. The Ministry said it will seek criminal charges against Sishen.

Nonetheless, both Kumba and ArcelorMittal are separately asking the High Court to overturn the award of prospecting rights for the Sishen mine to ICT, whose owners include Jagdish Parekh, a business partner of Duduzane Zuma, son of the RSA President.

ICT’s receipt of the rights was based on “incomplete, manipulated and fraudulent title deeds” according to Loxton. Plus, Kumba says it’s the only party eligible for the rights to the Nation’s largest iron ore mine.

ArcelorMittal lost its rights after failing to renew the title. In turn, prompting Kumba cancelled an agreement to supply 6.25 million metric tons of iron ore at cost plus 3% to ArcelorMittal when it learned the prospecting right was awarded to Imperial.

Kumba is 63% owned by Anglo American and Sishen Iron Ore is 74% owned by Kumba, 20% by Exxaro Resources with the balance (6%) with the locals.

- Exxaro Resources profit climbs 33% on coal and iron ore
Exxaro Resources, the second largest coal producer in South Africa, said H1 net profit rose 33% to Rand 3.2 billion ($445 million) as increased demand for the fuel drove up prices and its share in an iron ore venture boosted earnings. Sales, meantime, rose 22% to Rand 9.6 billion which meant profitability at 33.3% versus 30.5%.

Coal producers in South Africa have seen profits buoyed by higher prices as sales to steelmakers and power plants recover. An improved performance at its mineral sands businesses together with an increased contribution from a 20% stake in Kumba’s Sishen mine boosted earnings with a Rand 2.4 billion contribution ($334 million).

While Exxaro does not produce iron ore itself, it is “constantly evaluating” projects in West Africa and Australia and would consider raising equity funding to buy the right assets.

- African Minerals seeks tighter takeover protection
The largest company on AIM will ask shareholders next month to vote on increasing its takeover protection due to the belief that its corporate profile will rise once it starts producing iron ore. The provisions will be a diluted version of the UK’s Takeover Code; note that African Minerals is Bermuda-registered and, thus, not covered by the Code. Similarly, African Minerals last month appointed Deutsche Bank as its nominated adviser and broker.

The Company expects to start producing iron ore at its flagship Tonkolili project in Sierra Leone this year. Shandong Iron & Steel, the World’s ninth-largest steel group, has agreed to pay $1.5 billion for a 25% stake in the project and African Minerals’ shares have risen 13% so far this year (to 474.25 pence), valuing it at £1.6 billion.

African Minerals’ Chairman is the colourful Frank Timis, a self-made Russian billionaire, who owns 12.4%; with Timis Diamond Corporation holding 12.6%. He is committed to remaining a Director of African Minerals until Phase III development of the project has been completed. Tonkolili is expected to produce 12 million tonnes of iron ore a year at full capacity, rising by 23 million tonnes and by 45 million a year following planned Phase II and III expansions.

- ENRC H1 net profit rises 29% on higher commodity prices
Kazakhstan-based and London-listed Eurasian Natural Resources Corporation, the World’s largest ferrochrome producer, reported H1 profit up 29% at $1.17 billion on sales ahead 32% to $4.01 billion. However, this meant a cost-driven dip in margins from 29.8 to 29.2%. The H1 dividend of 16 cents a share was increased by 28%.

Producers of ferroalloys have seen profits buoyed by rising demand from Asia’s auto, electrical appliance and building sectors. Benchmark European prices for ferrochrome averaged $1.30 per pound in the first half, 9.7% higher than a year earlier, according to Merafe Resources, which part-owns ENRC along with Xstrata.

“We expect the progress in the Group’s financial performance to continue through the second half, although at a slower rate than in the first” said ENRC’s acting CFO Felix Vulis. “Overall group unit costs are expected to rise at around 20% in 2011 in addition to some limited volume growth”. Q2 output of ferroalloys rose 0.8% to 398,000 metric tons and ferrochrome production gained 3.2%.

The Company plans to complete a three month governance review to restructure the board by the middle of September and is committed to remaining a UK-listed company. Shareholders voted on 8 June against rehiring independent directors Richard Sykes and Kenneth Olisa in a corporate governance dispute.

Vulis, who resigned on 4 February and remains in the post while the Company seeks a replacement, would not say whether he would stay on as CEO after the process.

ENRC is investing in iron ore assets to diversify output and extend its geographic reach as Chinese demand for the steelmaking material drives up prices. The Company, which is spending $11 billion to boost output across all its divisions, is seeking to produce 19.5 million tons of iron ore by 2014 and 45 million tons by 2016. The iron ore unit accounted for 43% of the Company’s $1.93 billion EBITDA in the first half of the year and it produced 8 million tonnes of saleable production.

- Magnitogorsk is sued by partner in iron ore unit
It is reported that Magnitogorsk Iron & Steel has been sued by its partner in an iron ore venture after assuming ownership of a license to the venture’s largest ore deposit, according to Interfax. Atop International Group, which holds 49% of the OAO Bakalskoye Rudoupravleniye venture, filed a suit in Chelyabinsk, after the license to the Techenskoye ore field was transferred to Magnitogorsk in May following regulatory approval. A spokesman for Magnitogorsk said he sees no legitimate grounds for the suit.

- Renova in talks to buy Ukrainian metals assets
Russian billionaire Viktor Vekselberg’s Renova Group is in talks to buy metals assets of Viktor Pinchuk’s EastOne LLC, it is reported by Kommersant. EastOne is looking to sell 25% of companies which control three ferroalloy plants and two iron ore processing facilities in Ukraine, including Nikopolsky Zavod Ferosplavov (NFER), one of the World’s biggest iron ore plants. The stakes may be worth a total of as much as $1.5 billion, added Kommersant.

- China Minmetals and Sinosteel face a renewed magnesite price fixing case in the US
China Minmetals Corporation, China’s largest State-owned metals trader, and Sinosteel must face claims they conspired to fix the price of magnesite sold in the US, according to a Federal Appeals Court ruling. The US Court of Appeals in Philadelphia reversed a lower court decision dismissing the lawsuit. The lower court erred in ruling that it lacked jurisdiction to decide the dispute based on a federal statute, the appeals panel said, remanding the case for further proceedings.

- Cliffs Natural Resources in four million share buyback
The largest producer of iron ore pellets in North America has announced that it has approved the repurchase of up to four million of its shares. “Given the recent volatility in the global equity markets, today’s adoption of a repurchase authorisation will allow Cliffs to opportunistically acquire shares at attractive valuations” said Cliffs Natural Resources CFO Laurie Brlas. She also added that the share repurchase programme expires at the end of the year.

- Anglesey Mining’s Labrador Iron signs iron ore deal
Labrador Iron Mines (33% owned by Anglesey Mining PLC) will sell and ship its iron ore production for 2011 to the Iron Ore Company of Canada. Thereafter, it will be delivered to Asia and sold at spot prices based on actual realised prices to Chinese customers. The Company will move the ore from the James mine in north west Labrador by rail to the Port of Sept-Iles in Quebec.

Real estate special (August No.3): the house medicine is working

2011-08-22T00:52:00.001-07:00

…...but the Chinese authorities are increasing the dose. That is in July, house prices rose 4.3% on a year ago, but only 0.1% on June; and, while focused on the month-by-month comparison, 14 cities from a total of 70 large and middle sized conurbations dipped by between 0.1 and 0.3% In July, while 15 were flat. What’s more it is reported today that the Housing Ministry will, by the end of this week, announce a new list of at least 30 second and third tier cities which must implement home purchase restrictions too.

But it is a slow down not a stop and must be viewed in the context of a Chinese property market in which investment, overall, was up 34% at Yuan 3.2 trillion in the first seven months of the year with sales running 26% to the good (these were also better than the H1 scores where the comparative percentage growth was 33% and 24% respectively). See also the individual company performances below

- Detail
On Thursday, the NBS published the official residential price league table for 70 cities in July (albeit we had already had a sneak preview from Soufun in the first week of August). This showed that new house prices were 4.3% higher year on year but only 0.1% ahead July on June (Soufun said 6.8 and 0.2%). Within these tallies only one city was down year on year (Sanya) with one flat (Hangzhou); albeit month on month, 15 were flat (including Beijing, Shanghai, Xiamen and Guangzhou), while 14 dipped by between 0.1 and 0.3% (including Chongqing, Hangzhou, Nanjing and Ningbo).

More revealing, perhaps, is the seven month evolution which definitely shows that the Government medicine to cure house price inflation is working; albeit there were divergent views in the media. And, okay in some peripheral cities there may have been have been some advance purchases made ahead of an inevitable extension of restrictions. For example, the July winner was Urumqi with an 8.9% year on year gain, supported by Lanzhou, Shijiazhuang and Dandong all up by between 7.7 and 8.6% on the same basis.

NEW HOUSE PRICES IN JULY (% change)
In month and On year
January 0.8 and 5.9
February 0.4 and 5.7
March 0.3 and 5.2
April 0.3 and 4.3
May 0.2 and 4.1
June 0.1 and 4.2
July 0.1 and 4.3

China’s housing transactions in July also fell - by a massive 30% - from June to Yuan 348.7 billion, said the NBS on 9 August. But this may have been a one-off trend; and we will need a longer time series here.

In terms of opinion, Mizuho Securities said “the data is encouraging as we see prices in big cities such as Beijing and Shanghai have stopped rising. The Government is determined to cool down the prices in the short term”.

“This is the beginning of a downward trend in property prices in China, with more second and third tier cities introducing purchase restriction policies” added Daiwa. “Price declines will occur in more and more cities in the coming months”.

“One thing for sure is that the Government has a strong determination to control the property market” said Yu Liang, President of China Vanke (on 9 August).

It is also reported that the Housing Ministry is, by the end of this week, likely to announce a list of at least 30 second and third tier cities which must implement home purchase restrictions.

The property sub-index with the Shanghai Composite (SCI) has fallen 3.5% in August (through 19/08) and 12.1% in the year to date; which compares with the SCI at -6.2% and -9.7% respectively.

- Agile does as it is
In other news, Agile Property said its H1 sales rose 65.5% year-on-year to Yuan 11.72 billion (1.42 million square metres) and that it sees no need to lower property prices despite tightened housing curbs. Note, however that the Company generated 39% of sales at its Clear Water Bay project in Sanya in Hainan Province; and that normalised net profit for the period almost doubled to Yuan 2.6 billion, which meant adjusted profitability rose from 18.4 to 22.0%.

"Around 25% of our current property projects are located in cities with home buying restrictions, and despite wide market speculation that Beijing would extend the restrictions to more places, we don’t see the need to cut prices at this point” said Chairman Chen Zhuo Lin. He also cited those cities which, for Agile, had “restricted” projects including Guangzhou, Foshan, Chongqing and Nanjing. However, Chen added that Guangzhou contributed Yuan 3.6 billion (31%) to the developer’s total H1 sales, meaning actual demand remains strong. In total, Agile has 70 projects in 26 cities.

Chen did admit the housing curbs have had a big impact on the real estate market, but he also said that Agile Property had been able to dodge some of the impact by slowing down land purchases. For example, it spent some Yuan 1.5 billion on land plots in H1, compared with Yuan 10 billion in the same period last year. The Chairman also said that they would put forward more projects in H2 and plans to acquire land plots in Yunnan, Xi’an and Guangzhou. In addition, Yunnan would be another key market for Agile, where it expects to build a project similar to Clear Water Bay.

- Gemdale, Shui On and Keppel
In contrast, Gemdale said it H1 net income fell 61% from a year ago to Yuan 478.3 million as sales revenue dropped 41% to Yuan 5.16 billion (and with it margins from 14.0 to 9.3%). However, timing issues were the problem and the majority of its projects are scheduled to be completed in Q4. Indeed, as of the end of June, the Company had ‘transaction area’ of 2.42 million square metres on the go which represents Yuan 30 billion in transaction value – none of which was recognised in H1.Gemdale also said that, with a weather eye on Government policy, it will expand investment in the second and third tier cities this year.

Similarly, Shui On Land, the Shanghai-based developer controlled by Hong Kong billionaire Vincent Lo, said first half profit fell 50% after it completed fewer properties. Net income in the six months to 30 June dropped to Yuan 784 million ($123 million) on revenue which slumped from Yuan 3.12 billion to Yuan 1.79 billion. This led to net margins declining from 50.0% to a still remarkable 43.8%. Going forward, the Company’s focus is high quality real estate residential and commercial projects - which target a growing middle class – and it plans to spend Yuan 8 billion ($1.3 billion) to develop Hongqiao Tiandi, an office and restaurant precinct in Shanghai. Shui On is also planning to hive off its property leasing business in China by way of a Hong Kong IPO.

Finally, Singapore’s Keppel Land has secured a 21.5 hectare lakefront residential site in China for Yuan 1.937 billion ($303 million). It is located in Wuxi in Jiangsu Province and will be the fourth project for Keppel in the City.

“A dose of adversity is often as needful as a dose of medicine” – Anon.

6.3820

2011-08-17T01:59:00.000-07:00

The eagle-eyed amongst you will know that this number is the new all-time spot trading peak for the Yuan against the US dollar during what has been described as a Government-led “mini-revaluation”. In the same vein, the official China Securities Journal this week jumped on the band wagon with a front-page editorial saying that the time “is ripe” for China to widen the Yuan’s trading band, versus the dollar, which will pave the way for a more flexible exchange rate.

Okay, the new Yuan rate was recorded on Tuesday just before the close of business in China – and today it has eased a little to 6.3873 (the last time I looked). However, probable heir apparent to the PRC Premiership, Li Keqiang (56) is in Hong Kong today throwing Yuan around like a man with no hands. Ostensibly he is fronting the China Ministry of Finance’s Yuan 20 billion ($3.1 billion) ‘dim sum’ international bond offer (the largest ever) which will be launched tomorrow. However, he also said that foreign investors will now be allowed to buy mainland securities up to an initial quota, also, of Yuan 20 billion; although no timetable for this ‘mini-QFII’ has been set. Plus he pledged support for Hong Kong’s financial sector; and he’s only been in town one day.

The clever cash now says that the Yuan is in the front line in the battle against domestic inflation (+6.5% in July including food at +14.8%), while interest rates and RRRs are on leave. Note, too, that the seven day repurchase or repo rate is, today, at 3.23% (again, the last time I looked); at the end of July it was north of 5%.

US Vice President Joe Biden is in China this week and will welcome the news on China’s currency; while at the same time having his ‘the-US-is-good-for-it debts’ cap very much in hand.

It may also be the case that the Yuan will begin appreciating against other major currencies: in a torpid world, China remains the fastest growing major economy. Indeed, while the Chinese currency has risen nearly 7% since being de-pegged, its nominal effective exchange rate against a trade-weighted basket of others, has fallen by some 4.5% since June 2010, according to the Bank for International Settlements.

Soft landing
More broadly, support for a soft landing for the economy has come from The Conference Board (TCB), a US research group. It’s leading index for China rose 1% in June to 158.9, which follows a 0.6% gain in May. “The economy is significantly moderating right now and also over the next couple of months. We still expect it to be pretty much a soft landing”. However, beyond six months, the Chinese economy may face “more problems” as a result of bank lending which remains at levels which are probably not sustainable, added TCB. That said, new lending in July was the lowest this year at Yuan 492.6 billion ($77 billion) and money supply, as measured by M2, rose 14.7% after June’s 15.9%. The same is true of industrial production in July which rose at 14% against June’s 15.1%. Producer prices, however, remain a concern at +7.5% in July versus 7.1% in June.

This trend towards economic moderation is supported by the State Information Center which says GDP will slow from 9.5% in Q2 to 9.3% in Q3. Inflows of capital will help sustain growth, although this also impacts on PBOC policies to control inflation. That said, UBS sees CPI moderating to 4% by the year end.

Nor is there any let up in FDI or Foreign Direct Investment in China which rose 19.8% in July to $8.3 billion from a year earlier; and for the first seven months of the year, the increase was 18.6% to $69.2 billion, according to the Ministry of Commerce. The same goes for fixed asset investment (ex. rural households) which was 25.4% ahead in the seven months January through July. And, in July itself, retail sales rose 17.2% with car sales ahead 6.7%. Indeed, China’s growth and expanding consumer market have encouraged companies including Nissan ($7.8 billion by 2015) and McDonalds to increase their presence; the latter reckons on opening an outlet a day in China over the next three to four years.

It was, thus, perhaps surprising that China’s trade surplus in July ($31.5 billion) was the highest for more than 24 months as exports hit record levels: up an annualised 20.4% to $175 billion. And this despite the fact that imports in July rose by more in percentage terms at +22.9%; but they were worth less at $143.6 billion. Similarly, China’s current account surplus jumped to some $70 billion in Q2 said SAFE i.e. the State Administration of Foreign Exchange. This means it has more than doubled between the ends of Q1 (from $29 billion) and Q2.

Local authority debt
Turning to the vexed question of local authority debt, the Chairman of the China Bank Regulatory, Liu Mingkang, said today that the clean-up of local government debt is moving ahead smoothly and that risk from more than $1 trillion in loans is under control. He also reiterated that Chinese banks are prohibited from lending to local governments that do not meet loan requirements.

The Ministry of Finance (MOF) has also sought to calm the markets on the scale and efficacy of local government debt. As we know, S&P estimates that as much as 30% of China’s lending to local governments may go sour, after the loan book reached Yuan 10.7 trillion ($1.7 trillion) at the end of 2010 (and Moody’s thinks it is more than this – which is disputed by MOF). Similarly, Societe Generale is also cautious saying that the banking sector’s non-performing loan ratio is already at 7% and local government debts could push that above 16%. Separately, the China Securities Journal says that local governments will see Yuan 4.6 trillion of debt (or 43% of the total) mature by next year. Similarly, the risk weighting for banks on local government loans is 300%, it says.

MOF has admitted that the ability of some regions to meet liabilities is weak; and some local governments rely too heavily on land income to pay back debt. However, it also says that China’s local governments have fixed assets, land, natural resources and many other assets; and the national economy is at a stage of fast growth. MOF is also reported to have drafted a preliminary plan which would allow some provincial and city governments to sell bonds to investors on a trial basis. And, some Yuan 2.1 trillion of local government liabilities are also believed to have been reclassified as normal corporate credit.

US debt
Turning to the international markets, it is also interesting/perplexing that China has raised its holdings of US government debt for a third straight month to $1.17 trillion in June; and this included the first bill purchases since January. Other foreign investors, meantime, were sellers of Treasuries for the first time since 2009. Is this because China believes in the US or that it simply wants more power over its largest trading partner?

ACC
Finally, I must mention my old friend Anhui Conch Cement, the Nation’s largest cement producer, and a first class barometer of domestic economic health. Its H1 net income rose 234% to Yuan 6 billion ($939 million) and, this week, its share price (Yuan 25.52) is within Yuan 4.0 of its all time high.

“The China story will remain appealing for many years to come” - Fang Sihai, Chief economist at Hong Yuan Securities

SHANGHAI COMPOSITE
Today: -0.26% to 2,601.26 at close
This week: +0.31%
Last week: -1.27%
August: -3.7%
YTD: -7.4%
Year ago: -2.6%

HANG SENG:
Today: +0.38% to 20,289.03 at close
This week: +3.41%
Last week: -6.33%
August: -9.6%
YTD: -11.9%
Year ago: -4.0%

OIL: $87.27
GOLD: $1796.10
(new spot intra-day high of $1,817.60 on 11/08/11)
EURO/$ SPOT: 1.4379

Real estate special (August No. 2): Super-tanker

2011-08-15T05:53:00.000-07:00

It is hard to believe that the Chinese property market is slowing down after reading the statistics for July. Investment was up 34% at Yuan 3.2 trillion in the first seven months of the year with sales running 26% to the good, over the same period. Furthermore, when looking at the first half comprarative percentages, these were both lower at 33% and 24% respectively. For the bears, they might scratch at floor space under construction which was up ‘only’ 31% in the first seven months (at 4.2 billion square metres) after +32% in H1. Same goes for the Real Estate Climate Index which dipped from 101.75 in June to 101.50 in July (in October last year it was 103.57).

On a brighter note was funding from ‘own funds’ rising 34%, while mortgages dipped 5%. Talk about cash under the mattress? I also think China Vanke’s fall-out in the month of July, with contracted sales (as opposed to net) off 32%, was an individual aberration.

In Hong Kong, though, there is no such ambiguity and, as the economy dipped in Q2 (with GDP off 0.5% quarter on quarter), so the housing market is under the cosh. Asking prices are down 10%, with more to come, and a key land auction this month came in a reported 30% below expectations.

Of course, the PRC real estate market will slow down, because the Government is intent on it; especially price appreciation. And there are clues, with both Beijing and Shanghai sitting on unsold housing stock equivalent to 10 times monthly sales; and 353 parcels of land at auction failing to sell in the January to July period – which is an increase of 242%. Nonetheless, there is also a 36 million, five year affordable housebuilding programme (albeit that 2012’s annual target has been trimmed from 10 to 8 million).

The domestic real estate market in China is a super-tanker and your average one takes 14 minutes to stop - even when it wants to. A super-tanker also needs two kilometres of ocean to turn around in.

- Robust RE market in first seven months

Metric January-July % change (first 6 months)
Investment Yuan 3.19 trillion +33.6% (32.9%)

Sales (value) Yuan 2.89 trillion +26.1% (24.1%)
Sales (volume) 520.4 million m2 +13.6% (12.9%)

Funds raised Yuan 4.79 trillion +23.1% (21.6%)
Own funds Yuan 1.93 trillion +34.0% (32.7%)
Mortgages Yuan 486.9 million - 5.1% (- 7.9%)

Floor space UC* 4.2 billion m2 +30.8% (31.6%)
Floor space New 1.2 billion m2 +24.9% (23.6%)

RE Climate Index 101.50 (July) 101.75 (June); & 103.57 (Oct)
*UC = under construction
Source: NBS

China’s annualised growth in real estate investment and sales sped up in July even as the Government raised additional controls on the sector. Property investment in China grew by 33.6% in the first seven months of this year to Yuan 3.2 trillion, up from 32.9% in H1. Meantime, actual property sales increased by 26% to Yuan 2.9 trillion over the same period (H1 24%); and as measured by volume, sales rose 13.6% in the January-July period from a year ago to more than 520 million square metres (which is more than 5 billion square feet) with H1 at +12.9%.

Clearly, China's push to build more affordable housing together with and robust buyer reservations last year have galvanised the gains. That said, both China Vanke and Poly RE, have started to reduce prices slightly as the policy outlook turns against them; and more will inevitably follow suit. Indeed, it is reported that large cities such as Beijing and Shanghai have unsold residential property equivalent to more than 10 times their current monthly sales. Chinese banks are also cutting their exposure to the real estate sector, although the banking regulator has repeatedly said it is confident the sector can withstand home prices falling as much as 50%.

All that said, widespread price cuts have not been seen, and home prices in most cities are still rising, albeit at a slower pace.

- China’s regulators tell banks to tighten property lending
It is reported that the Government has told banks to tighten lending for real estate as it anticipates possible credit issues as its constraints on the market make a greater impact. This follows China Banking Regulatory Commission’s edict last month not to extend the maturity of loans to developers, not to grant new credit to help developers repay maturing debt and to set significantly higher standards on loans for commercial properties than residential.

The CBRC has also said that lenders should be vigilant about funds “illegally flowing” into the property market. Similarly, the banks have also been told to be particularly alert to risks in commercial properties, where the regulator said speculative funds are increasingly flowing because of controls in the residential market. There was also been a 70%+ rise in developers raising debt from overseas in the first half.

- China reduces target number of affordable homes in 2012 by 20% to 8 million units
The Chinese government has cut its affordable housing development target by 20% for 2012 to 8 million units, it is reported. But this is fine tuning and the construction of State-subsidised homes is crucial for the success of China's ongoing campaign to control property inflation.

- China tells banks to fund building of low cost housing
Chinese banks should lend to healthy local governments which are building State-subsidised homes, according to the China Banking Regulatory Commission. Indeed, the banking regulator has made it clear that it does not want its credit restrictions to starve all local governments of funding. “Banks can lend to local government financing vehicles which have sufficient capital, are well managed, and whose business revenue can cover interest repayments” said the CBRC. Reuters has also reported that loans issued for the construction of affordable housing should not be priced below 0.9% of the PBOC’s benchmark lending rate and should have maturities no longer than 15 years.

- China Vanke’s H1 profit rises 5.9% on sales in smaller cities
The Nation’s largest developer by market value said H1 net profit climbed 5.9% to Yuan 2.98 billion ($460 million) to the end of June as it sold more homes in smaller cities which were less impacted by Government controls. Net revenue, meantime, increased 19% to Yuan 20 billion, which meant that net profitability dipped from 16.8% to 14.9%.

Government’s policy has had an impact on the property industry, but larger quoted companies such as Vanke are holding up well because the measures are aimed at speculative purchases said Daiwa Securities Capital Markets.

Vanke, which expanded into smaller cities such as Qinhuangdao and Taiyuan, completed the sale of 1.1 million square metres (11.8 million square feet) of homes in the six months, accounting for 15% of its target for the year. “With more fittings in the homes we sell, our construction cycle has become longer and we are even lagging behind. But with more homes to be completed in the fourth quarter, we expect the year’s settlement value to be much higher”.

“Vanke achieved great sales amid the Government’s curbs, but the key is delivery” added Daiwa. “They are going to face a big challenge in second half in delivering those homes to customers who paid in advance”.

The developer focused on small and medium sized homes in the first half as it aimed to sell them quickly; and some nine-tenths of its apartments are smaller than 144 square metres.

“Vanke’s sales are better than its peers because most of its products target the mass customer rather than high end properties which the Government is cracking down on” said Credit Suisse. “Their move to smaller cities also helped because the measures in those markets weren’t as strict as those in big cities”.

Vanke, the first among China’s biggest developers to report first half earnings, had Yuan 40.8 billion of cash by the end of June, up 10% from Q1. It is “cautious” about buying more sites, although it will still “seize good opportunities” for land that may emerge this year, continued Credit Suisse.

- Vanke sees July's contracted property sales tumble 32% to Yuan 9.08 billion, month on month; although they are still ahead 64% in the first seven months of 2011
China Vanke reported contracted - but not completed - property sales of Yuan 9.08 billion in July, which is a fall of some 32% month on month (this is not be confused with net revenue - as above). However, contracted property sales in the first seven months of 2011 were Yuan 74.1 billion, up 64% year-on-year; and by volume it agreed to sell 6.37 million square metres of apartments during the same period, which is an increase of 61%.

The developer attributed its July sales drop to a reduced number of properties available for sale in that month, adding that it would accelerate new offerings in the coming months to boost sales.

China Vanke has been faring well under the Government’s strict property polices over the past months, but it is starting to feel the pinch too. “We expect current property measures to continue and play a bigger role in reining in the housing market in the rest of the year. And as developers’ sales are being hampered, competition will be hotting up as we all are trying to reduce as much inventory as possible” it said. The Company also added that it would continue to adopt a prudent approach, which it believes has helped it cope with tough times in the past and underpinned it leading market position.

China Vanke has been cautious in land buying in the first half on concerns of market uncertainties; but expects better opportunities to reserve more land in H2. The developer also initiated a promotion in July to counter pressure from other developers volunteering to cut prices. It offers a slight discount of Yuan 5,000 per unit, which is probably more apparent than real.

- China Overseas Land & Investment see H1 net profit rise 35% to $871 million
China Overseas Land & Investment, a Hong Kong-based builder controlled by the Chinese Construction Ministry, said H1 net profit climbed 35% (including exceptional gains) to HK$6.8 billion ($871 million). Meantime, sales rose 25% to HK$21.9 billion which means a net profit margin of 31.1% (vs 29.0%).

The developer’s profit rose even as China expanded efforts to prick any incipient real estate price bubbles. The Government said last month it will rein in residential prices in smaller cities after limiting home purchases in metropolitan areas including Beijing and Shanghai. “China Overseas diversified portfolio in both the Country’s major and smaller cities helped boost their sales performance and the earnings” added Yuanta Securities. “Looking forward, the developer has sufficient resources to generate profits from projects”.

The Company is “confident” about the medium and long term development of China’s property market, referencing industrialisation and urbanisation.

China Overseas, which builds homes and offices in China, Hong Kong and Macau, said operating profit rose 37% to HK$10.9 billion. Operating profit from mainland China increased 29% from a year earlier, accounting for 79% of the overall result.

The Company’s contracted sales advanced 82.4% in the first seven months from a year earlier to HK$60.3 billion.

“The Company has already achieved more than half of the year’s sales target” said CLSA Asia-Pacific Markets. “China Overseas already operated in those home purchase restriction zones in the first half, so their earnings in the next half will not be much different”. The developer acquired 16 plots in China in the first half and plans to expand its land bank at low cost in the future.

China Overseas cut prices for four projects around the country this year by 10 to 15% from a year earlier, the Company said last month. The price reduction helped boost its market share, added CLSA. For its part, China Overseas said it will not be “over-optimistic” and will follow closely the changes in China’s economy and policies.

- China largest housing contractor sees H1 sales rise 79%
China State Construction Engineering Corporation, the Nation’s largest housing contractor has said that sales in the first seven months of the year rose 79% from a year earlier to Yuan 56.6 billion ($8.8 billion) as it won construction contracts worth a combined Yuan 482.1 billion, which was 51% more than a year earlier.

- Poly Real Estate sees 38% rise in contracted sales in July
China’s second largest developer by market value, said contracted sales in July rose 38% from a year earlier to Yuan 5.1 billion.

- R&F Properties remains confident
Guangzhou-based R&F Properties, whose property projects are principally in first and second tier cities, said sales rebounded in July to Yuan 3.03 billion after a less robust performance in May and June. This meant, too, that in the first seven months, sales rose to Yuan 16.45 billion, which is 41% of its full-year target of Yuan 40 billion. And, this goal remains remains unchanged; however R&F is looking to diversify to lower tier cities including Harbin.

- Hong Kong apartment sellers cut asking prices
Hong Kong house prices - which surged 70% since the end of 2008 - are set for their biggest decline since Lehman Brothers collapsed in September of that year. Slower global and economic growth is cited (Q2’s GDP fell 0.5% versus Q1) as well as Government policy of increasing land supply increases.

Already, according to Midland and Centaline, the City’s two largest real estate agents, house prices are being reduced by as much as 10%; and the former already reported that June and July saw the first consecutive falls in price since December 2008. Similarly, UOB Kay Hian says “we should see at least a 5% further correction in the second half if the crisis in the US and Europe deepens”. Home transactions also fell to a 30 month low in July.

Part of the growth in the Hong Kong residential market has been attributed to buyers from other parts of China, which Centaline estimates accounted for about a third of new luxury property purchases in Hong Kong in the first half. This may slow down now as the PRC economy slows and the Government takes policy action on controlling the domestic real estate market. “China periodically undergoes cooling and that is likely to have some knock-on effect on their demand in Hong Kong’s residential market” said Savills. “We don’t expect it to be long lasting and we think previous growth would resume after six to eight months”.

- Key Hong Kong land auction misses expected price
Hong Kong sold a residential site at a lower-than-expected HK$5.5 billion ($704.7 million) at auction ast week. It is reported that the sole bidder was a consortium which includes Kerry Properties (40%), Sino Land (40%) and Manhattan Group (20%). And the site located in Shatin in the New Territories is for for luxury apartments and comprises 23,000 square metres (247,600 square feet) from a gross floor area of 96,000 square metres.

“The (weak) result was a bit of surprise” said Credit Suisse. “It suggests the Government is willing to sell land at a lower price and that land prices may trend down in future”. It also suggest something of a buyers' strike too. Note, too, that a sample of expectations from seven consultants and securities firms pointed to an average price forecast of HK$8.08 billion.

Iron & steel weekly: L.I.F.E.G.O.E.S.O.N.

2011-08-15T01:56:00.001-07:00

“What you don’t have now will come back again. You’ve got heart and you go in your own way” sings my favourite band of the summer Noah & the Whale; and on such young shoulders rests much wisdom. We all know that the current turmoil in financial and commodity markets (let alone on the streets of Great Britain) will not last; just as a new record gold price of $1,817.60 won’t either.

Similarly, amid these seismic shifts, there are also pockets of rationality with one being the iron ore market and its relatively stable prices. A fact underlined, too, by World Number One, Vale, ably supported by Number Three, BHP. This is not to mention the United Nations whose Conference on Trade and Development says iron ore will be short supply until at least the end of 2013 (and maybe longer). It also says that the oligopoly in supply is a good thing.

Meantime, Baosteel is raising prices next month ahead of the traditional seasonal rise in demand in China. What's more domestic steel production is ahead 10% in the first seven months of the year, with iron ore imports running 7.9% to the good. Finally, the Singapore Mercantile Exchange has just launched the World’s first international/US dollar-based iron ore futures contract due to rising demand for such a service.

- Baosteel raises prices (as does US Steel)
Baosteel, China’s largest by market capitalisation, says it will raise prices in September by Yuan 60 to 90 per metric ton in anticipation that demand will rise. “The traditional peak consumption season is approaching, and demand for flat steel products will improve in September” said Custeel.com. Others producers are likely to follow on price.

Meantime, in North America, the World’s eighth largest producer, US Steel has also announced September price increases of $60 per ton, which is about 10% (note, however, August prices to date are down some 9%). Steel Market Intelligence also senses a turning point “we suspect we are at the bottom in steel prices, and expect an inflection point in coming weeks, as Europe and the Middle East come back to work”.

- China’s steel production in July rose by an annualised 16%; with iron ore imports ahead 6.4% (prices remain firm)
In China, daily steel production has been at more than 1.9 metric tons since February; global economic uncertainty withstanding. And this includes, a month on month dip of 1% in July (to 59.3 million tons) due to electricity supply issues; but July was still 16% up year on year (and production an annualised 10% better in the first seven months of the year to 410.4 million tons). In May, production hit a record of 60.3 million tons.

On the raw materials front, China increased iron ore imports by an annualised 6.4% in July (and 6.8% month on month) to 54.55 million tons as steelmakers began to replenish stocks with a view to a seasonal uptick in demand. Note, too, that in the first seven months of 2011, imports increased by 7.9% to reach 388.63 million tons.

Prices are also firm and the cash cost of 62% iron ore arriving at China’s Tianjin port has risen for five straight weeks (and 71% in the past two years) through 5 August, according to Steel Index. However, prices dipped 0.06% on 8 August to $178.10 per ton and again (0.2%) on 9 August to $177.8, which is neither here nor there. The record was set in February at $191.90.

- Big two remain confident on China
Vale and BHP also remain confident with the former’s CEO Murilo Ferreira saying that he expects iron ore prices to remain “strong” because of demand in emerging countries such as China and India. Iron ore prices are not changing amid the rout in equities and commodities markets worldwide, he added. “Nations with large populations and rising middle classes will continue to demand commodities. These countries have a big hunger for raw materials so I believe the market will continue strong. If we continue this trend, we will have the third consecutive quarter without altering prices”. Vale’s iron ore prices averaged $145.30 per ton in Q2, an increase of 58% from the same period a year earlier.

Similarly BHP Billiton Chairman Jac Nasser says China will continue to grow at 7 to 9% but “we will see only low growth levels for the US and Europe for as far out as we can see”.

- UN says iron ore will be in short supply until at least 2013
The United Nations has also put its hand up and said that iron ore will remain in short supply until at least 2013 and possibly longer, according to its recent Conference on Trade and Development. New projects will add at least 500 million tons and “probably” over 600 million tons of capacity by the end of 2013, which is the earliest time when supply and demand will be brought into equilibrium.

“In spite of a massive pipeline of investment projects, the market will remain tight over the next couple of years because the large iron ore producers can implement their expansion plans with a great deal of flexibility”.

Iron ore use is forecast to increase to 1.91 billion tons in 2011 and to 1.99 billion tons in 2012, from 1.82 billion in 2010. Meantime, production reached a record 1.83 billion in 2010, up 17.6% on the previous year. The UN also says that the big three - Vale, Rio Tinto and BHP Billiton - controlled 58% of the 989 million ton World seaborne iron ore trade in 2010; and the ability of these three (who also controlled 35% of World production in 2010) to regulate the pace of projects will prevent overcapacity. Finally, the price of iron ore will “decline slowly” reaching a “floor” of $110 to 120 per ton delivered to China.

- the futures bright
A further reflection of a robust market comes from the Singapore Mercantile Exchange which has launched an iron ore futures contract. It will be the World’s second for iron ore price hedging after two exchanges in India launched the first in January. Unlike the Indian contracts, however, which are denominated in Rupees and are limited to domestic players, the SMX contracts will be priced in US dollars and open to global investors.

- Japan, Australia, South Africa and Lapland
Elsewhere, steel demand in Japan will fall short of expectations as political wrangling holds up cash injections. The estimated reconstruction bill after the earthquake (nine on the Richter Scale and an astonishing 120 seconds in duration) and mammoth tsunami (including the worst nuclear power station crisis in 25 years) runs to $220 billion.

A ways further south in Australia, Angang Steel’s Pangang Group Steel Vanadium & Titanium says it will invest more than $300 million in its Karara iron ore mine project in Western Australia. Its 50:50 partner Gindalbie Metals will add the same amount. It is reported that, based on trial operations, Karara is forecast to produce approximately 2 million tons of hematite in 2012.

In the same country BHP Billiton, the World’s largest mining company, has elected to absorb its Western Australian iron ore contracting unit from Leighton for $735 million. The purchase is in line with BHP’s intention to move to owner-operator mining.

Then on Saturday in South Africa, Kumba Iron Ore workers marched in the Northern Cape Province to protest over safety issues, according to the National Union of Mineworkers. “This is part of the build-up towards the national day of mourning which will be held on 4 October when mineworkers will down tools in pursuit of their demand to be safe”.

Finally, the wonderfully named Beowulf Mining has announced that the Kallak South drilling programme in Sweden’s Lapland has been completed – and indicates a find of over 400 million tons of 30% Fe iron ore. It will now look in north and south Kallack.

Keep your head

2011-08-08T04:08:00.000-07:00

Interesting times? I would call them tumultuous with the T-word and D-word being increasingly bandied about (i.e. the “Thirties” and “Depression”). And, as a glass-half-full sort of scribe, it is getting difficult to ‘keep you head’ (and I have put Kipling back on the shelf); it is also difficult to find a different way of saying the same thing.

Okay, the percentage declines in World bourses are easing, save for China where today the Shanghai Composite closed 3.8% down (at 2526.82) and, by number, it was 0.39 off a 100 point fall (although it had been triple digits down in morning trade). August's inflation data is due to be promulgated tomorrow and little respite from July’s 6.4% is expected – but with the signs posts good. The smart money, too, says, there will be one more interest rate rise in China; but is this wise in the current climate? Already the Yuan is at new post-regulatory high (it touched 6.4250 against the US dollar today) and the Chinese Government is buying more and more dollars.

In terms of commodities, there is little doubt that today will add to Friday’s eighth day of losses as measured by the Standard & Poor’s GSCI Spot Index (the worst since December 2008). But tell that to gold market, where - at the time of writing - the price had hit a new record of $1715.75. But real life goes on and, in particular, check out the news flow in iron and steel (posted earlier).

“Be prepared to ride the cycles and trends of life; success is never permanent, and failure is never final” - Brian Tracy

SHANGHAI COMPOSITE
Today: -3.79% to 2,526.82 at close
Last week: -2.79%
August (so far): -6.5%
YTD: -10.0%
Year ago: -4.9%

HANG SENG:
Today: -2.17% to 20,490.57 at close
Last week: -6.66%
August (so far) -8.7%
YTD: -11.0%
Year ago: -5.5%

OIL: $83.58
GOLD: $1709.80
(new ‘immediate delivery’, intra-day high of $1715.75 on 8 August 2011)
EURO/$ SPOT: 1.4260

Iron & steel weekly: keep your head 2

2011-08-08T03:45:00.000-07:00

- China is to launch its very own iron ore index; as prices record a 42.4% rise in H1 for an additional cost of $16 billion
Not before time, the China Iron and Steel Association has said it will begin a trail run of its iron ore index some time in August, according to Zhang Changfu, its Vice Chairman. This will be followed by an official launch in October and the data will be released on a weekly basis. The index will consist of two sub-indices related to domestic iron ore and imports.

Prices of imported iron ore averaged $160.89 per ton in the first half of this year, hitting a record high, and recording an annualised gain of 42.41% according to the Association. In the first six months, China’s steel producers imported 334.25 million tons of iron ore and the price increase added Yuan 104.11 billion ($16.02 billion) to costs.

- H1 steel volumes rise 9.6% in China; and should clear at least 10% for the year
The Chinese steel industry maintained relatively fast growth in H1 with steel output up 9.6% at 350 million tons, according to CISA. And, for the full year, it expects this year’s output to be between 690 million and 700 million tonnes from 627 million tonnes in 2010 (i.e. +10.0 to 11.6%). Note, too, that the price of raw steel in north China rose almost 2% last week to Yuan 4,520 per tonne, it is reported. July was a busy building month in China, especially for social housing projects.

The Ministry of Industry and Information Technology (MIIT) has also talked about steel trading and believes that China is likely to export 45 million tonnes of steel products in 2011, which would be an increase of 5.7% year on year. Going the other way imports are expected to be little changed at 16 million tonnes compared with 16.43 million tonnes in 2010. Steel product imports in the first half fell 4.8% from a year earlier to 8.03 million tonnes, while exports edged up 3.2% to 24.33 million tonnes.

- Steel mill utilisation in China up to 84% but profitability (3.14% in H1) is under pressure and probably unsustainable
Strong demand has raised steel mill capacity utilisation to 84% in H1 - up three percentage points from the end of last year, says CISA. It also says that China’s steel industry has some 800 million tonnes of steel production capacity – which is at least 100 million more than demand in 2011. This, plus the rising price of iron ore has kept the industry under pressure and CISA says that industry’s profitability, as measured by its ‘sales-profit-ratio’, was just 3.14% in the first half. In my view this is unsustainable. Either, prices have to rise and costs fall (possible) or the industry needs to step up its rationalisation (more likely). Looking forward, too, MIIT has warned that steel production may slow in the second half on lower industrial production growth, power outages, the closure of inefficient steelmaking capacity and tighter credit.

- Indian spot prices for iron ore firm up ; and in one reported deal hit $188 delivered in China:
Indian spot iron ore prices also remain firm and reflect both tight supply and expectations that higher Chinese steel prices will support demand. Shipments from the World’s third largest exporter have been disrupted by the monsoon and a slow resumption of exports in the State of Karnataka (where around one quarter of the Country’s iron ore shipments originate). Supplies have also been hit by Government bans on mining/exports.

On Tuesday last week Indian fines with a 63.0 to 63.5% iron content sold to at least one Chinese trader for $188 per tonne, including freight, it is reported. This is roughly $2 more than the week before. That said, the smart money is focused on shipments priced at less than $185. On a modestly positive note for volumes, too, India’s State-run NMDC raised its iron ore output target to more than 30 million tonnes in the year to March 2012, after the Country’s top court allowed it to restart mining in Karnataka (the earlier target was 28-29 million tonnes). That said, even after this news, JSW Steel is still only operating its mills at 80%.

- Rio disappoints in H1 due to currency and labour costs; its iron ore business, however, was robust:
Rio Tinto, the World’s second largest mining company, reported last week its underlying profit in the first half of 2011: up 35 % to $7.8 billion, which missed analysts’ forecasts which were clustered around $8.3 billion (foreign exchange movements alone cost USD 810 million). The Company also expanded its share buyback by $2 billion to $7 billion.

The Company underlined the impact of the rising Australian dollar (the US currency fell 16% against it in H1) and labour costs which are hurting earnings and which will be a challenge in coming years, putting pressure on expansion plans.

In terms of the iron ore market, CEO Tom Albanese said it will remain tight as global suppliers are struggling to meet demand from China. Its economy is estimated to expand by close to 9.5% this year, driving global growth to 3.0 to 3.5% in 2011, he said. “Many producers around the world are struggling, too, with their own supply and their own growth and that’s continuing to keep tight conditions and higher prices for iron ore”.

OTHER NEWS
- Coal & Allied:
Rio will also look at more acquisitions after tidying up it joint holding (with Mitsubishi) in Australia’s Coal & Allied. The two (who will end up with an 80:20 split respectively) have offered to buy the 14% they don’t own for A$1.49 billion ($1.56 billion) or A$122 a share, a 34% premium to the coal miner’s last trade. Perpetual Investments, which owns 6.3%, backed the offer although Coal & Allied said the offer was incomplete and was not capable of being accepted.

- Sesa Goa buys in Liberia:
Also in India, Vedanata-owned Sesa Goa said it has agreed to acquire a 51% stake in Liberia-based Western Cluster Limited for $90 million from US owner Elenilto Minerals & Mining. WCL is the winner of a bid to develop the Western Cluster iron ore deposits floated by the Government of Liberia: with access to over 1 billion tonnes of potential resource.

- Bellzone looks to iron ore from Guinea:
Bellzone Mining will initiate iron ore production in the Guinean town of Forecariah in March 2012, says CEO Nik Zuks.

- Zambia may mine as much as five million tons of iron ore annually:
Zambia will probably “soon” mine as much as five million tons of iron ore a year, according to Radio Phoenix.

- India’s Essar to invest up to $4 billion in Zimbabwe steel plant:
Indian conglomerate Essar plans to spend up to $4 billion building a steel plant which will access iron ore from Zimbabwe’s Mwanesi resource within the next five years, it is reported. This would be the largest single foreign investment in Zimbabwe’s difficult economy and would equal around two thirds of its GDP.

- ArcelorMittal to sell China JV stake to Nippon Steel; but is criticised by CISA about is relationship with Valin:
The World’s largest steelmaker has agreed to sell its 12% stake in an auto sheet joint venture with China’s Baosteel and Japan’s Nippon Steel to the Japanese firm. This will mean that the latter two will own 50% each. AM said the move is aimed at focusing on another automotive JV project with Hunan Valin. However, the China Iron & Steel Association (CISA) has criticised ArcelorMittal for not fulfilling its commitment to support Valin, especially on iron ore supply.

- Taiwan’s China Steel and Sinosteel form an alliance:
Taiwan’s largest steelmaker has signed a strategic alliance agreement with Sinosteel Corporation, which is controlled by the PRC Government. The companies will strengthen cooperation in areas including production, trading, engineering and management. No financial details were provided.

- CSN may buy more shares in Usinas:
Cia. Siderurgica Nacional SA (aka CSN), the Brazilian steelmaker which posted a 30% gain in Q2 net income (to Reais 1.14 billion or $726 million), may buy more shares in domestic rival Usinas Siderurgicas de Minas Gerais SA (USIM5) after building a 10.2% stake. CSN has been buying stock in its bigger competitor since at least January and its Q2 sales gained 12% to Reais 4.32 billion as iron ore increased 8.3% from a year earlier to a record 6.74 million metric tons. The Company also posted a gain of Reais 698 million from selling a stake in Riversdale Mining to Rio Tinto in April. CSN expects “stability” for steel prices in H2 and plans to spend Reais 11 billion over the next five years on mining and port investments.

- Toyota agrees to pay $169 more per ton of sheet steel after discussions with domestic supplier Nippon Steel:
Toyota has agreed to Nippon Steel’s demand for a price rise of Yen 13,000 ($169) per ton of steel sheet for the April-September period, it is reported. The increase is the largest since the first half of fiscal 2010 when prices were jumped by almost Yen 20,000.

This time, it’s different

2011-08-05T03:13:00.000-07:00

“It’s like all these times when you second guess yourself and you probably wake up a little earlier than you’re used to, and maybe you put an extra finger of scotch in the glass”.

So said investment legend, Laszlo Birinyi, as he reiterated his positive stance on US equities. President of the eponymous US money manager and aged 67, Birinyi was one of the first to say buy when the current bull market began in 2009. Others have joined in, too, as Wall Street tanked 4.3%, or more than 500 points, yesterday in what was part of a global rout of stock values. Fear has gripped investors and, as for the reasons why, take your pick from a perm of European sovereign debt default, a US double dip, global depression, etcetera.

In China, the Shanghai Composite was mild today by comparison with a mere 2.2% fall to its lowest level since 29 September last year. Indeed, look at the Hang Seng which fell more than 900 points (and over 1,000 at one stage) to close 4.3% down.

And, just as the insensitive journalist asked at Ford’s Theatre in 1865: “apart from that Mrs Lincoln how was the play?” - for China, the performance wasn’t at all bad. Its economy was beginning to slow but not stall, there were indications that inflation was moderating (aside from July’s number which is due on Tuesday) and the Yuan hit a new post-deregulation record against the US dollar of 6.4386 (on Thursday). Even the seven day repurchase rate was playing ball. In June, this benchmark measure of money market liquidity averaged 5.90% (the highest since January 2004) and in July 5.26%. At lunchtime today, however it was 3.0135%, which is regarded as pretty close to a manageable/sustainable level. It may not be a slam dunk in terms of there being no more interest rates, but it could well be an assist.

Near term, most bets are off. Medium and longer term, though: is it different this time? Yes it is; and no it isn’t. “Yes” because the global bail out worth $1,879 per head for every person on the planet preceded this latest crisis; and “no” because, recovery will follow slump as it always has - unless the paradigm has shifted (which it has not). And, in particular, Chinese equities are cheap fundamentally and relative to their global peers.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful” - Warren Buffett

SHANGHAI COMPOSITE
Today: -2.15% to 2,626.42 at close
This week: -2.79%
July: -2.2%
YTD: -6.5%
Year ago: +0.2%

HANG SENG:
Today: -4.29% to 20,946.29 at close
This week: -6.66%
July: +0.2%
YTD: -9.1%
Year ago: -2.8%

OIL: $85.84
GOLD: $1666.70
(new ‘immediate delivery’, intra-day high of $1681.72 on 4 August 2011)
EURO/$ SPOT: 1.4128

ECONOMY
• PBOC says inflation may rebound if policy is loosened
• Manufacturing growth in July hits 28 month lows with official PMI at 50.7 (Nov. 2010: 55.2); with HSBC/Markit more cautious at 49.3 at the smaller end
• Non-manufacturing PMI up from 57.0 to 59.6 in July; though HSBC/Markit dips from 54.1 to 53.5 (focus on private companies)
• No China bubble, says Standard Chartered CEO
• Primavera Chairman says China has seen “a clear slowdown. But that might be just what the doctor ordered”

CASH
• The PBOC has suspended borrowing by domestic companies from overseas banks; plus there are new limits for borrowing by foreign-invested companies
• CRBC is reported to have told banks to set aside more to cover losses on loans to local governments
• Ministry of Finance begins selling $3.52 billion of three year bonds for local governments at a yield of 4.07%.
• China rating agency, Dagong Global, has downgraded US sovereign debt from A+ to A with a negative outlook.

COMPANIES
• China Vanke’s July property sales tumble 32% to Yuan 9.08 billion month on month; but still +64% in first seven months of 2011
• China’s cement makers had a combined profit of Yuan 35.2 billion in the first five months, up 170% year on year
• Cement prices in China rose Yuan 54.24 in June
• TCC is to buy 97.9% of Scitus Cement China for $130.2 million

HK
• Hong Kong’s June retail sales jump 29% (to $4 billion) on tourists from China

Real estate special (August No. 1): predator-free dry land

2011-08-04T07:17:00.000-07:00

With amphibious reptiles (aka alligators) nipping at his heels, it was difficult for the engineer to remember that his primary task was swamp drainage. Yeah, I know this is an old one; and a cliché. Nonetheless, with World stock and bond markets in turmoil (although not meltdown) and gold hitting a new record above $1680 - it is difficult to sustain focus on China's biggest single sector: real estate.

- New July house prices rise 0.2% (month); & 6.8% (year)
Average new home prices in 100 major Chinese cities rose 0.2% in July (June: 0.4%) from the previous month to Yuan 8,874 ($1,378) per square metre, which is the slowest growth in 11 months – and reflects Government controls. This is according to China Real Estate Index System (CREIS) and SouFun, the Country’s largest online real estate company. Year on year, however, the rise was 6.8% versus 5.2% in June. These data come ahead of the official Statistics Bureau release on the 18th of each month. CREIS added, too, that “some developers have started to cut prices quietly and more will do so in August; and, with supply rising in September and October, Chinese developers will face more downward pressure”.

Central government, thus far, has also been targeting property speculation in major cities, and these performed less well than smaller conurbations. For example, new home prices in the top 10 Chinese cities rose 3.9% in July from a year earlier (versus 6.8% overall), but stayed roughly the same month-on-month. Among the top 10, Guangzhou and Shenzhen led price rises in July, with annual growth of 10.1% and 10.0% respectively, while prices in Shanghai saw an annual decline of 0.1% (although month on month there was a gain of 0.4% on the CREIS scale; and 2.6% according to UWin to Yuan 22,051 per square metre).

Inevitably, perhaps, the Government has now begun extending control measures to second and third tier cities (in total this is reckoned to number about 40).

- Discounts more common
Amid heightened uncertainty, it is also widely reported that developers are either reducing selling prices or thinking about it. For example, China Overseas Land & Investment, Longfor Properties, Top Spring International and Country Garden, have been offering limited discounts in recent months. Meantime, County Garden sliced 25% off some units at Daya Bay in Huizhou, Guangdong. This means being able to buy for as little as Yuan 4,125 per square metre. Similarly, market leader China Vanke reduced prices by Yuan 5,000 per unit at 11 of its projects.

- Less land buying
Buying land has also become less popular and the Government failed to sell 353 parcels of land, including 163 pieces for residential development, at auction in the first seven months of this year. This is more than double the amount in the same period a year ago, according to Beijing Homelink Real Estate.

- Less cash
Funding is an issue too, especially for the smaller developers. In June, the China Banking Regulatory Commission (CBRC) told banks to reduce loans to property developers to avoid risks (following stress tests); and it is claimed in the marketplace that some banks stopped lending to the Sector altogether (that said, trust firms are reported to be lending at 20%; and in the unofficial ‘grey’ market rates are running as high as 40%).

In any event, H1 lending to real estate industry was down. For example, PBOC data show that new added loan growth in the period was Yuan 598.5 billion less than the growth volume in same period of last year. This means that China’s new lending to the real estate industry in H1 totalled Yuan 791.2 billion ($122.9 billion).

Almost counter intuitive, then, were comments from the CRBC Chairman Liu Mingkang who said commercial banks were capable of sustaining a 50% drop in housing prices (not everyone agrees).

- Hong Kong developers are coming
But it’s an ill wind…..and Hong Kong developers are increasingly looking to move in, as their PRC counterparts face difficulties, as outlined above (especially finance). These include Swire Pacific, which has just sold a mall in Hong Kong for $2.4 billion (its biggest ever deal) and is expected to spend much of this cash in China. It is already building five shopping malls and offices in China including in Guangzhou and Chengdu.

In addition, Hang Lung Properties said it has built up Chinese currency holdings of Yuan 20 billion ($3.1 billion) for PRC projects while Sun Hung Kai, the World’s largest developer by value, added almost 280,000 square metres to its China landbank in H2 2010, bringing the total to 7.6 million square metres. Similarly, Cheung Kong has almost 41% of its gross assets in Chinese cities outside of Hong Kong. Together with its partners, too, it added 1.17 million square metres to its landbank in China in the second half of last year.

Hong Kong developers can also afford it. The top 51 developers in the City have an average debt-to-equity ratio of 47%, compared to the average 126% in China, according to Bloomberg.

- CapitaLand likes China
From further afield comes CapitaLand, South East Asia’s largest property developer, which expects to invest more than S$6 billion ($4.97 billion) this year, mainly in Singapore and China. The Company (40% owned by Singapore State investor Temasek) is particularly optimistic about demand for housing in China, despite Government control measures. Singapore and China each accounted for some 36% of CapitaLand’s total assets as of the end of June; and, in H1, CapitaLand invested S$5 billion, principally in Singapore, China, Australia and Vietnam.

Although CapitaLand’s sales volumes in China declined in H1 compared with a year earlier, its average selling price increased by Yuan 1,000 ($155.4) per square metre. And, it expects to market some 2,500 more residential units in the second half of the year and has a pipeline of 22,000 units over the next four to five years.

- Affordable/Commercial
The low cost housing sector also remains robust and the Ministry of Land and Resources said that land supply for this sub-sector rose 24% in H1 to 16,477 hectares. The Government plans to construct 10 million affordable housing units this year and 36 million over five.

The Commercial Sector also remains popular and in Guangzhou a piece of land for office and retail construction sold at a floor space cost of Yuan 17,933 per square metre, a new record.

- Conclusion
My good friend Rational Man (RM) is thankfully standing on his own two feet on dry land; and he has deduced, from the above, that the residential property market in China is slowing down. This is more apparent than real, right now - which will change, of course; but it won’t crash (of course). The Commerical Sector also remains robust. And, a good friend of RM’s agrees. He is Li Ka-shing, Hong Kong’s richest man and Chairman of Cheung Kong (see above) and back in 2008 he predicted China’s stock market decline: “Every task that’s carried out in China these days has gone through careful consideration", he said. "I don’t think there’ll be a hard landing and I’m not concerned”.

Iron & steel weekly: Wilde about ore

2011-08-01T07:28:00.000-07:00

In Lady Windermere’s Fan, Act 3, Oscar Wilde wrote that a cynic is a man who knows the price of everything and the value of nothing. However, this said non-believer would have his work cut out for him in the iron ore market; save for the overwhelming conclusion that the price is going up. For example, ArcelorMittal South Africa said the price rose 23% in H1, while Kobe Steel has its money on a 15% lift in Q2 (to $169 per metric ton) versus a year ago and Hyundai Steel paid 25% more Q2 on Q1. Meantime - Value - sorry Vale, the World’s number one producer, said that its price of iron ore was 58% up in Q2 against last year at $145.30 per ton. Finally, Morgan Stanley reckons that for the full year the average will be $170 in 2011, up from $122 last year - an increase of 39%.

More precise is Metal Bulletin which, on Thursday, said the price of 62% iron ore delivered to China rose 19 cents to $175.45 per tonne, which is the highest since 19 May. This is due to some local difficulty in India, which is the World’s number three geographical producer (after Australia and Brazil). Here, the Supreme Court has banned mining in the key iron ore region of Karanataka, which accounts for around a quarter of India’s export. You will recall, too, that last week I referenced a Reuters opinion poll which suggested that Indian iron ore exports could fall by a fifth to 71.25 million tonnes in the year to March 2012; with the Federation of Indian Minerals Industries estimate at 64 million tonnes.

- Vale
Elsewhere, the World’s largest iron ore producer, Vale, posted its Q2 net income on Friday (CET); and despite a 74% surge to $6.45 billion, net income missed analysts’ estimates by around 14% due to a weaker US dollar and rising new project construction costs. To make up for this, though, the company paid an extra dividend of $3 billion or 57.7 cents per share (in fact Vale will spend $11 billion on buy backs and dividends this year). In the same period, net sales rose by a hefty 55% to $15 billion in the quarter, helped by an increase in output of almost all products. In turn, this means a truly astonishing net margin of 43.0% (versus 38.3% last time, which was none too shabby itself).

In total, Vale produced 80.3 million metric tons of iron ore in the three months through 30 June – an increase of some 6% year on year. Regionally, a third of its revenue came from China, up from 30% in Q2 and 28% on last year. The Company is benefiting particularly from higher iron ore prices (as above).

Vale’s plan, however, to operate a $2.3 billion fleet of giant iron ore freighters has proved unpopular in its largest market; and China’s largest shipping companies are lobbying the Government to sink this maritime initiative. For example, Zhang Shouguo, Executive Vice Chairman of the China Shipowners Association (CSA), says that Vale should hire shipping companies to run the new prospective fleet of 19 directly-owned vessels with individual capacity of 400,000 tons (known as Valemax’s) plus another 16 under long term contract. “Vale is seeking to control the freight market as it has done with iron ore prices” added Zhang. Note, too, that the CSA, which represents 85% of China’s total shipping capacity, may also seek Government help to determine whether or not Vale will breach Chinese regulations.

- ArcelorMittal
Earlier in the week, it was the turn of the World’s largest steelmaker to report Q2 numbers (it makes some 7% of the World’s steel - double that of number two). In the three months to 30 June, ArcelorMittal (AM) saw net profit fall 11% to $1.54 billion; however, when discontinued operations are removed, net profit was down just 3%. Sales, meantime, went the other way with a 25% price-based rise to $25.1 billion from a year earlier and 13% from Q1 (with volumes static at 22.2 million tonnes). In turn, this meant a cost-induced squeeze on net margins from 7.9 to 6.1% (this is one seventh of Vale’s return).

However, AM has been working towards a greater level of self-sufficiency in iron ore (and coal). In Q2, its in-house iron ore production rose 11% on Q1 (with coal up 7%; and, at this time, AM is battling jointly with Peabody to buy Australia's Macarthur Coal worth in excess of $5 billion). In 2010, the Company increased iron ore output 30% to 48.9 million tons and plans to expand this by at least a further 10% this year.

The Company also expects higher volumes in H2 with demand from China and the auto industry ensuring no repeat of the sharp slowdown seen in Q3 last year. For example, steel consumption in China, not a main market for AM but key in the dynamics of price and demand, should rise by more than 8.5% this year, it says; meaning global sector expansion of 7.0 to 7.5%.

To be fair, other producers are less sanguine, especially US Steel, AK Steel and Nucor – all in the US. Similarly, South Korea’s Posco is cautious too. Raw material costs (iron ore and coal) are the number one issue.

- Sierra Leone
On a brighter note, African Minerals had risen some 7% to 662 pence per share by lunchtime today after saying China’s Shandong Iron & Steel will invest $1.5 billion for a 25% stake in the Tonkolili iron ore project in Sierra Leone. Shandong, the World’s ninth largest steel group, will buy iron ore at a discounted price under an off-take agreement and retains the option to buy up to 25% of the project’s annual iron ore output. For the record, African Minerals is listed in London and is the largest company on AIM with a market capitalisation today of £2.2 billion.

- Gold
Finally, given that the US isn’t going bust (just yet), the gold price paused for breath and, at the time of writing, it was $1624.60 (down from Friday’s intra-day record of $1637.50).

“The truth is rarely pure and never simple” - Oscar Wilde

Tragedy

2011-07-25T03:02:00.000-07:00

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

Iron & steel weekly: $1,624.07

2011-07-24T22:30:00.000-07:00

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

Real estate special (July No. 4): The Good, the Bad and the Soft

2011-07-18T06:51:00.000-07:00

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”.

China iron & steel weekly: Stairway to Heaven

2011-07-18T02:05:00.000-07:00

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

Real estate special (July No. 3): quick, quick, slow (ish)

2011-07-13T05:57:00.000-07:00

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

Mister Softee

2011-07-13T05:56:00.001-07:00

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)

Blue, red, blue, red and red

2011-07-12T03:45:00.000-07:00

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

Hu is an insider?

2011-07-11T07:18:00.001-07:00

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

Iron & steel special (July No. 2): “we aren’t feeling any contraction in demand”

2011-07-11T01:01:00.001-07:00

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

Stop press: interest rate rise

2011-07-06T07:17:00.000-07:00

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

Real estate special (July No. 2): no one is going to crash and burn

2011-07-06T04:11:00.000-07:00

'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

90 not out

2011-07-04T01:22:00.000-07:00

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

Real estate special: the medicine is working

2011-07-03T13:16:00.000-07:00

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

Iron & Steel Special: “Wake up and…”

2011-07-03T06:22:00.000-07:00

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

Weekend Special: “Wen in Rome (or in Budapest, London or Berlin)….”

2011-06-26T02:24:00.001-07:00

Sharp-eyed readers will note that this missive was penned over t’weekend. I am speaking at the Intercem Conference in Barcelona early next week and will be off-blog point until Thursday. Good luck. www.intercem.com

It was St Ambrose in the year AD 390 who coined the much plagiarised precept: “when in Rome, do as the Romans do”. In practice, it advises that it is both polite, and advantageous, to abide by the customs of a society when one is a visitor.

China’s Premier Wen Jiabao is a pretty astute fellow and the first thing he did on his current Europe tour (24 through 28 June) was to pen an exclusive opinion piece for the Financial Times. Herein, he said that China’s efforts to reduce inflation have worked and that the pace of consumer price rises will slow. “There is concern as to whether China can rein in inflation and sustain its rapid development - my answer is an emphatic yes. China has made capping price rises the priority of macroeconomic regulation and introduced a host of targeted policies. These have worked. The overall price level is within a controllable range and is expected to drop steadily”.

Wen also pointed to evidence of a moderation in lending and money supply, an “oversupply of main industrial products” and “abundant” grain. For example, new loans ($549 billion) for the first five months of 2011 are an annualised 12% lower, while M2 in May rose the least (15%) since November 2008.

Straight away China’s money market rate declined, ending seven days of advances, on speculation that the PBOC will cease raising interest rates i.e. the seven day repo rate fell 56 basis points to 8.48% on Friday morning, having touched 9.20% earlier, the highest level since October 2007.

Similarly, the Shanghai Composite hauled itself off the floor and ended the day 2.2% to the good and 3.9% on the week. Okay, it is still 10.2% off its 2011 high (18 April) but at one stage was 14.3% down on this basis (at 2621.25 on Monday). The Hang Seng did pretty much the same thing (although it is a net 8.1% off its April peak, having been down 10.5%).

Even the Yuan joined in and, after bouncing off another spot record of 6.4643 (on Wednesday), it closed the week at 6.4715. Furthermore, Twelve Month Non-deliverable Forwards decreased 0.3% last week to 6.3927 per US dollar on Friday morning. The contract was at a 1.2% premium to the spot rate in Shanghai.

And, finally, Ai Weiwei was released on bail after more than two months in jail; and another prominent dissident Hu Jia, who has just completed a three-and-a-half-year jail term, was also released.

Back on tour, at his first port of call in Budapest, Wen pledged support for Europe at this time of crisis and added that China will remain an investor in European markets, including sovereign debt. “In recent years, we have increased by quite a big margin our holdings of government bonds. We will consistently continue to support Europe and the Euro”.

China will also buy a “certain amount” of Hungarian government bonds, he added. In fact China is targeting an increase in trade with Hungary from $8.7 billion last year to $20 billion by 2015. It is also extending a Euro 1 billion loan via its State Development Bank to finance projects in Hungary. In addition, China plans to set up a European transportation logistics base as part of 12 agreements which the two nations signed on the visit; plus make a $1 billion investment in the Hungarian chemical industry.

At the time of writing, on Sunday (CET), Wen was in the UK, where he will most probably be hobnobbing with PM David Cameron at his country residence - ahead of further meetings in London. Then its Angela Merkel’s turn in Berlin.

In other news, China’s manufacturing industry may well have expanded at its slowest pace in 11 months in June, according to a preliminary or ‘flash’ PMI. The 50.1 level reported from HSBC and Markit compares with a final reading of 51.6 in May. A number above 50 indicates expansion. “Demand is cooling thanks to the effect of tightening measures and the slackness in external markets” said HSBC. “But hard landing worries are unwarranted as inflation pressures are easing and industrial production can maintain momentum”. HSBC/Markit’s early PPI is based on 85 to 90% of the total responses to its monthly survey of more than 400 companies. The final reading will be published on 1 July.

Even more startling, is RBS’s view on Chinese equities. It says that the MSCI-China Index could see 40 to 80% of upside through 2012. Okay it is not alone (Citic is newly positive and HSBC is plumping for a 20% rise) but it is the most bullish. RBS points to easy US monetary policy and China’s macro approach which will help the MSCI China Index reach a PER of 18.2x next year; this compares with the current year’s 11.4x. It also believes that rising participation of the private sector in social housing will help support fixed asset investments and provide further impetus. RBS noted, too, that although the private sector housing market appears to be under some pressure, property developers have quietly hopped on the Government’s social housing bandwagon.

Even Henry Kissinger (now 88) is positive, saying - at the Second Global Think Tank Summit held in Beijing - that China, with its growing financial assets and expanding global economic reach, has gained a new confidence; particularly during the fight against the global financial crisis. He also said that China’s growth was one of the essential factors which had prevented a far worse global downturn in 2008; and reminded his audience of the IMF calculations which show that an additional 1% of real growth in China, sustained for five years, adds 0.4% to global growth.

Morgan Stanley’s Chairman Stephen Roach is another high profile bull and likes, in particular, China’s dynamic refocusing towards its consumers. He expects China’s private consumption as a share of GDP will rise as much as five percentage points between now and 2015. In 2008, he says consumption accounted for just 35% of GDP. “I think it’s a great start in the direction of getting the Chinese consumer going and I encourage all of you to take a look at what they’re proposing in terms of job growth, boosting wages and building up the safety net. Over the next five years you’re going to see a powerful impetus from the Chinese consumer, allowing export-led China to wean itself from the zombie American consumer”.

Elsewhere, ING’s Tim Congdon has gone as far as saying that there will be no further interest rates this year (okay he’ s bit lonely right now). “We think the balance of risks for the State Council has shifted to growth from inflation” and “we view Wednesday’s comment by an NDRC official that inflation could accelerate (to 6%) in June as preparing public opinion for higher inflation”.

The PBOC has raised interest rates twice this year (to 6.31%) and the banks’ reserve ratios requirements six times (to 21.5% for the big boys). In my view RRRs are a rapier to interest rate's hatchet; and if ‘Roman’ Wen is right the medicine is working.

“Veni, vidi, vici” (I came, I saw, I conquered”)
- Julius Caesar 100 to 44 BC

SHANGHAI COMPOSITE
Friday: +2.16% to 2,746.21 at close
Last week: +3.91%
May: -5.8%
June (to date) +0.1%
YTD: -2.2%
Since 05/07/10: +16.2%
Since 08/11/10: -13.1%

HANG SENG:
Friday: -1.90% to 22,171.95 at close
Last week: +2.20%
May: -0.2%
June (to date) -6.4%
YTD: -5.5%
Since 25/05/10 +16.8%
Since 08/11/10: -11.2%

OIL FUTURES: $91.16
GOLD FUTURES: $1500.90
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4188

HEADLINES

WEN’S EUROPEAN TOUR 24 to 28 JUNE
• Chinese inflation is firmly under control says Wen in an FT article at start of Europe visit
• Wen says China will continue to buy European government debt and supports the Euro
• China will buy a “certain amount” of Hungarian Government bonds; and agrees to extend a Euro 1 billion loan
• China plans a transport logistics base in Hungary; and will invest $1 billion in its chemical industry
• HK Chairman of China’s sovereign fund (CIC), Laurence Lau says China is positive about Euro and a solution in Greece

ECONOMY
• HSBC/Markit ‘Flash’ PMI says China manufacturing in June looks set to slow – due to policy tightening
• Kissinger says China gains new confidence during GFC
• Vice Premier Li Keqiang jumps on ‘top priority is to tackle inflation’ bandwagon
• Inflation rate to slow, says State Information Center; although NDRC says it may hit 6% in June (highest since July 2008)
• China should raise rates soon to curb inflation, says China Securities Journal
• Asian consumers are needed to fight “American zombies” says Morgan Stanley’s Stephen Roach
• China food prices spike as floods ruin farmland
• China to give priority to hydro-electric development to 284 gigawatts by 2015

EQUITIES
• Chinese stocks could rise by 40 to 80% next year, says RBS
• Buffet-backed BYD online Shenzhen offering is 21 times oversubscribed; although at a projected $219 million, the IPO will raise less than expected for ‘Build Your Dreams’
• Anthony Bolton's Fidelity Special Situations Fund disappoints
• Macquarie and China Everbright have raised a $729 million China infrastructure fund

CASH
• Money market rate falls after Wen speaks on inflation
• Yuan Forwards declined last week (6.3927); Wen again
• Bank reserve ratio requirement hikes have created cash "pools" for future easing
• Chinese banks falter on monetary tightening
• PBOC tightens controls on offshore Yuan deals
• Credit squeeze has seen smaller companies paying five times base interest rates for debt
• US companies urge US Government to avoid legislation against value of Yuan
• Bigger international role for the Yuan only works with a more open capital account, says Ex-PBOC Advisor Fan Gang
• China should halt gains in Yuan, say two leading economists
• Greenspan says China is mistakenly using currency manipulation to increase employment; US not perfect either
• Hong Kong to provide daily Yuan benchmark from 27 June

REAL ESTATE
• Developers embrace projects for tourists in significant new trend
• Former Premier Zhu Rongji criticises policy of allowing local governments to retain land sale proceeds; but likes the affordable housing programme

COMPANIES
• TCC to spend $3 billion over the next five years expanding its cement operations in China
• Holcim says it is monitoring consolidation in Chinese cement
• Caterpillar remains bullish on China, despite Q2 sales decline
• Porsche Cayenne sales soar in China; as do other SUVs
• ICBC to buy Standard Bank Argentine unit for $700 to 800 million

INTERNATIONAL
• China and India to resume military ties after a year’s hiatus
• Russia and China are the best of the BRICs, says Jim O’Neill of Goldman Sachs

DOMESTIC
• Ai Weiwei released on bail in Beijing
• Prominent Chinese disident Hu Jia is released from jail
• Rains continue as floods kill dozens and force major evacuations
• Strong winds, heavy rains predicted along East China coast as tropical storm Meari approaches
• China offers riot informers cash and other awards
• Government blocks website (www.ibribery.com) which allowed citizens to report payoffs and bribes made to officials

Rock or sand: a Chinese real estate special

2011-06-24T00:18:00.000-07:00

The - freely adapted - Christian Bible (Matthew 7:24) says if you want your house to stand up in a rain storm/flood then build it on rock. This is what the wise man did. The foolish man, however, built his house upon the sand. “The rains came down and the floods came up and the foolish man’s house went splat”.

Equally divergent are the opinions in China as to how solid the housing market is, given the deluge of Government controls and wave of inflation. In the latest price data, however, there was succour for both. In May, for example, the price of new homes rose by an annualised 4.2%, which was down from April’s 4.5%. Similarly, month on month, May’s rise was 0.2% versus 0.3% in April. In terms of existing homes, May was pretty much flat at 3.2%, year on year, with no real change in the month.

The (beach) bears says that this is the beginning of the end while the (boulder) bulls welcomed the news, which they said underlined both the success of Government policies and the substance of demand. In terms of the latter, new prices rose in 67 of the 70 cities monitored by the Government (66 for existing). Similarly, in a number of less mainstream locations new prices rose by 7% or more and in existing ones by double digits.

The very wise man, Stephen Roach, Chairman of Morgan Stanley believes that the bears are wrong and that bubble fears are overblown as incomes rise and the largest urbanisation in history continues. “I can’t say a bubble will never happen”. But “the important signal Chinese authorities have sent is that unlike their counterparts in the West, they are focused on relieving or deflating bubbles before they become a major problem”.

Similarly, “the dynamics of prices this year will be much less aggressive than in the past” said Natixis. “If you look at the transaction volumes, the policies are working”. The investment bank also said it is significant that the Chinese government did not did not impose a nationwide flat property tax (to date it has been levied only in Shanghai and Chongqing).

“Underlying demand from the end users is still very much here” said JLL. “There’s no bubble from that perspective”. Nor are Chinese families saddled with big mortgages as domestic buyers have to pay at least a 30% down payment for the first home they buy and 60% for second homes, compared with as low as a zero down payment in the US and UK ahead of its financial crisis. “The western concept of bubble with tremendous level of leverage on home buyers clearly is not the case in China”.

Stephen Roach again. Too much is being made of the so-called Chinese property bubble as China’s urbanisation fuels demand for housing, he said. “China often puts new office and residential supply online before demand. Over the next 20 years, some 360 million people will move from the countryside to cities in China and that provides a powerful source of demand to absorb the supply that’s now being put in place”. Some 170 million people moved to cities in the last 10 years, the biggest urbanisation in history, according to the Chinese Academy of Social Sciences. What is more, the Chinese Government aims to increase the proportion of those living in cities from 47.5 to 51.5% by 2015, according to its latest five year plan; and this would be the first time that those living in the city outnumbered rural dwellers.

But, the process needs to be handled with care. Property accounts for some 10% of GDP and it is a key pillar of the economy. “The Chinese government is facing a dilemma on the one hand to control inflation while on the other hand not wanting the property market to crash” said Patrick Chovanec of Tsinghua University.

Also pragmatic is Citicorp which says that China’s investment in residential property accounted for 6.1% of GDP last year, the same as the record level in the US in 2005 preceding the sub-prime crisis. it also says that The Government is prepared to sacrifice 1.0 to 1.5 percentage points of GDP growth to restrain the property market. “China’s quest to curb property prices is one of the important parts to its fight against inflation. If home transactions slow, property-related consumption and investment might also slow, and take the overall economy with it”.

Nonetheless, Citigroup also adds that the dramatic rise in home prices should be “no surprise” given China’s 30 years of averaging 10% economic growth. “China’s rising home prices are strongly linked with the Country’s economy, which is a process of wealth accumulation”. Similarly, urban household income per capita rose 13.7% in 2010 from 2009; and there is great desire in China to be an owner occupier.

Foreign capital also continues to flow into the Chinese property market despite divergent opinions of which direction it is going. And, in the first five months of the year it surged by an annualised 57.3% to Yuan 26.6 billion. In addition, Singapore’s CapitaLand - which is also South East Asia’s largest developer - says it is aiming to double it portfolio in China over the next five years; and already has $8.1 billion invested.

My final layer comes from the Shanghai stock market where the sub-index of property developers with the Composite is now 7.5% up year-to-date in a stock market off by some 2.3%.

“The loftier the building, the deeper must the foundation be laid” - Thomas Kempis

HEADLINES

• Foreign capital continues to flow into Chinese property
• Chinese banks told to cut loans to property developers, according to Chinese press reports
• Local governments will be allowed to issue bonds to finance construction of affordable housing
• China new home prices rise by an annual average 4.2% in May, with gains in 67 out of 70 cities; existing homes rise by 3.2% (and all but four were higher)
• Government controls on housing market are beginning to have the desired effect; but, happily, in a pretty measured reality; and
• Down payments on houses may rise; for first homes from 30 to 40%
• PBOC poll shows that three-quarters of respondents think house prices are unacceptably high
• Singapore-based CapitaLand aims to double its China portfolio over five years on economic expansion
• Shanghai bar district is to be replicated in Shui On
• Beijing to re-offer nine lots in CBD on 6 July; in a year in which land sales have fallen in value by 75%
• Hong Kong home prices to fall by as much as 15% be year-end, says Walter Kwok
• Cheung Kong’s Chiu says he is “not that bullish” on Asia’s housing market: with Government measures making an impact in China; and in Hong Kong, a flatter outlook

"The Late Show"

2011-06-17T03:18:00.000-07:00

“TLS” is a song title from the wonderful Jackson Browne and the refrain includes: “now to see things clear it’s hard enough I know, while you’re waiting for reality to show”. (http://www.youtube.com/watch?v=lF7pMqCZWio)

This is what I think the Chinese Government and the PBOC are doing, despite the ‘reality’ of this week’s higher inflation, soaring money market rates, a record high for the Yuan and a tanking stock market; plus the odd bit of civil unrest. Okay, I have had my head in the (too-busy-in-London) sand this week, too, which is why you haven’t heard from me until now; hence, the raft of headlines below.

Taking these in turn, consumer price inflation in May (5.5%) was at its highest level for 34 months; and included an 11.7% shift in food prices (in August 2010 food price inflation was 7.5%). In response, the PBOC raised the RRR for the largest banks by 50 basis points to 21.5%; the sixth such move this year. This is designed to squeeze liquidity but higher interest rates can do the same. However, the PBOC has steadfastly refused to do anything on the latter; and this despite a two day movement in the money market rate of almost 250 basis points to 6.6%. In addition, the Yuan hit a new all-commers’ high today of 6.4716 to the US dollar. Okay, this was encouraged by the PBOC and will help inflation too (albeit further attracting hot money into the Chinese system).

Turning to share prices, China has not been alone in seeing a serious slump in share prices this week. Possible Greece sovereign default is front and centre and not budging right now. In any event, the Shanghai Composite is 2.3% off this week and 3.7% year-to-date and now at its lowest level since 30 September last year. At the same time, the Hang Seng has fallen 3.2% and 5.8% respectively and is also at its lowest level since September 2010 (20/09).

The push/pull from the bears and bulls continues with Nouriel Roubini hobnobbing with the former hard-landers and the likes of UBS and Blackrock (and me) in the softer herd. The Conference Board has also underlined the trend towards more moderate growth as have this week’s other data including bank lending (-12.5% year to date), M2 growth (at a 30 month low), PPI (unchanged in May), retail sales (below the five year average) and oil consumption (lowest annual growth since October).

Turning to real estate, S&P stole the headlines with its change in outlook for developers from “stable” to “negative” and its forecast of a possible 10% fall in house prices over the next 12 months. But this comes in contrast to the near 35% increase in property investment in the first five months of 2011; including a 9% increase in total floor space. There was also a Chinese real estate conference in Singapore organised by UBS – where the presenters were unanimously and vociferously bullish. Meantime, in Hong Kong, there is some circumspection in real estate (and added controls); nonetheless HKMA CEO Donald Tsang says home prices are rising at 2% per month.

I believe that we have come too far since the bottom of the GFC to regress now; and I expect a responsible solution to events in Greece (yes, this is a big ask). And in China, its wealth and solvent Government will will-out. But it will be a bumpy summer.

“But when you know that you've got a real friend somewhere, suddenly all the others are so much easier to bear” – JB

SHANGHAI COMPOSITE
Today: -0.81% to 2,642.82 at close
This week: -2.30%
May: -5.8%
June (to date) +0.2%
YTD: -3.7%
Since 05/07/10: +11.8%
Since 08/11/10: -16.4%

HANG SENG:
Today: -1.17% to 21,695.26 at close
This week: -3.23%
May: -0.2%
June (to date) -4.3%
YTD: -8.4%
Since 25/05/10 +14.3%
Since 08/11/10: -13.1%

OIL FUTURES: $93.40
GOLD FUTURES: $1526.70
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4225

HEADLINES

ECONOMY – data
• CPI in May was 5.5%, which is up from 5.3% in April; and the highest for 34 months
• Food prices rose 11.7% in May which compares with 11.2% in April (and just 7.5% in August 2010)
• PPI rose 6.8% in May which was unchanged on April
• Retail sales rose 16.9% in May, which is less than the average for the past five years
• FDI in first five months rises 23.4% to $48 billion; with May at +13.4%
• Oil demand in May topped 9 million bpd for seventh month in a row; albeit annualised growth slowed to 8.3% - which is lowest since October 2010
• Conference Board leading indicators shows more moderate growth: +0.2% to 154.5 in May (after a dip in April)
• Public expectations on inflation ease, says PBOC survey
• China’s industrial production rose 13.3% in May
• China fiscal revenue in May rises 34% yoy

ECONOMY – opinion
• Blackrock says China is set for a soft landing
• Inflation maybe heading for 6% says USB and SocGen; interest rate rise inevitable?
• Credit Suisse eases key one year lending rate forecast: 7.16% at year end from 6.31% now
• Credit Suisse forecasts China GDP growth at 8.7% this year and 8.5% in 2012
• George Soros says China has missed a window to stem inflation; and now risks a hard landing
• UBS says China stock valuations are “very attractive”
• China’s economy is at risk of a hard landing after 2013 at the latest, says Nouriel Roubini
• China number one in gold transactions (2010: 604.61 metric tons)

MONEY SUPPLY
• PBOC raises Reserve Requirement Ratio (RRR) by 0.5% to 21.5% for larger banks in the sixth such move this year; but no it adds no such shift in interest rates
• Seven day repurchase rate hit 6.6% on Thursday after two day gain of almost 250 basis points
• Broad money supply, as measured by M2, grew at 15.1% in May which is a 30 month low
• New lending in May at Yuan 551.6 ($85.1 billion) misses expected level of Yuan 610 billion
• New loans, to date, so far in 2011 are running 12.5% less than 2010
• Informal or “grey” lending markets is said to be thriving
• PBOC has not set a target for lending this year, but it is expected to reach Yuan 7.5 billion; which is less than 2010’s tally: Yuan 7.9 billion
• M2 in 2011 is expected to grow by 16%

CASH
• China sells just two thirds (at average 3.9576%) of its Yuan 20 billion bond sale due to interest rate concerns; this is the second time this year that it has happened
• Central bank fixes Yuan mid-point at record high of 6.4716 on Friday, while spot Yuan also hits new record of 6.4716
• SAFE warns on capital inflows
• FX purchases in May rise 21%, month on month, to $58.1 billion
• “Shadow” banking system is a concern, says UBS i.e. banks moving loans to trust companies
• China Development Bank cancels bond sale due to markets
• China increases US Treasury holdings by $7.6 billion in May to $1.15 trillion; this is the first advance in five months

REAL ESTATE
• S&P cuts China property developers outlook from “stable” to “negative” and the Sector may face a deepening correction; and it may be that home prices fall by 10% over the next 12 months
• China’s property investment rose 34.6% in the first five months of the year to Yuan 1.87 trillion; this included an increase in total floor space of 9.1%
• Property trust companies raised a record monthly inflow in May of Yuan 25.6 billion; albeit slower growth is expected in H2

INTERNATIONAL
• Wen to visit Germany, Hungary and UK from 24 through 28 June
• Beijing says “vital” interests are at stake in Europe's debt crisis
• China sends out patrol ship to territorial disputes in South China Sea
• Hilary Clinton chastises China on internet access and “new colonialism” in Africa

DOMESTIC
• China and mineral-rich Mongolia agree $500 million partnership
• Government pledges to improve lives in Inner Mongolia
• Corrupt officials took $124 billion out of China over 15 years, says PBOC report
• Social unrest is getting out of control, according to the Economic Time Bomb Fund
• Starwood Hotels says China will be its largest growth market in three-to-four years; it currently has 90 hotels under construction
• Heavy handedness used to quell riots in Hubei & Guangzhou
• Government boost to affordable homes funding, says Xinhua
• Individual tourism to Taiwan starts late June
• China’s second moon orbiter (Chang’e-2) goes to outer space

HONG KONG
• China wealth is fuelling Hong Kong home price surge (at around 2% per month), according to CEO Donald Tsang
• Home sales collapsed by 58% last weekend due to new HKMA rules
• HKMA raises home loan down payments in battle to ease house price inflation: 50% for HK$10 million or more
• Developers say prices may fall as a high profile luxury sale (Borrett Road) misses estimates
• Authority says it will supply land for 6,000 housing units in Q3
• Short selling climbed to an eight month high (as of 07/06) in Hong Kong on concerns about China

COMMODITIES
• Australia eschews ‘hard landing’ concerns for China
• China’s steel output in May rose to record on property build demand
• Australia’s resource exports dropped in Q1 due to the weather and flooding; but earnings here in 2011-12 fiscal year should still rise 16%
• Commodities bubble will not burst, says Excelsior Mining CEO
• Glencore may make $19.5 billion bid for ENRC, says UK Sunday Times
• Rio Tinto accelerates $676 million investment in Australian iron ore
• Rio is to offer portfolio of iron ore pricing
• Xstrata commences magnetite iron ore shipments from Australia
• Sable Mining acquires 60% of iron ore range in Liberia
• Essar plans iron ore terminal in Mozambique for Zimbabwe exports
• Essar says it will buy more coal and iron ore assets in Indonesian, Australian and African resources to meet India’s domestic demand
• Norilsk seeks to add copper, coal and iron ore assets in Indonesia and Latin America to reduce its reliance on nickel
• Maoist rebels kills 15 security personnel in India, which could stop investment in iron ore and other minerals

“Beginning of the Great Revival”

2011-06-10T02:23:00.000-07:00

This is the title of the latest Chinese blockbuster movie which was launched at a glittering party this week. It was pure Hollywood, unlike the subject matter which marks the 90th anniversary of the Chinese Communist Party and traces its origins from the 1911 revolution through the official founding on 31 July 1921. It is part of a series of events.

How the PBOC must wish that reality-imitates-art and that “Beginning the Great Revival” could also be a stock market headline. At the close today, the Shanghai Composite had nudged up but was still nearly 1% down this week, which makes it minus 3.7% for the year and minus 11.4% from April’s peak. This is despite, a growing number of commentators (the latest being HSBC, Credit Suisse and Deutsche) saying that it is time to buy the market, with HSBC looking for a 20% bounce by year-end.

But there is clearly no audio loop in this cinema and nor will there be until the PBOC raises interest rates. South Korea did so today (up 25 basis points to 3.25%) for what will be the same reasons as China. This was a bit of a surprise, though, whereas it won’t be in China. And, by way or a trailer, the repo rate has risen 130 basis points this week to 4.77% (in morning trade), the biggest gain since January and including some 63 basis points today. In any event, the main movie, May’s RPI data, is shown on Tuesday (14/06).

By way of a happier first feature, China today reported a less than expected $13.1 billion trade surplus for May as imports jumped 28% and exports slowed to 19% growth. Okay, this is up on April’s $11.4 billion but it was also significantly less than May 2010 ($19.5 billion). The bulls took this to mean that the Government is managing the economy and easing it away from being an export-led economy towards a consumer society; whereas the bears said the data underlined a slowing World economy and a domestic hard landing.

In its title credits, the PBOC can also claim to be directing the Yuan with some aplomb. For example, the spot rate dipped today to 6.4779 - after the Bank eased its fixing rate. This follows a record spot high of 6.4755 on Wednesday. It is clear now that appreciation of the currency (+1.7% this year) has a supporting role in the fight against inflation. Nonetheless, the PBOC maintains a hands-on approach towards the pace of gains with a weather eye on other economic variables.

In the real estate cinema, May made a very good showing with Agile, Gemdale, Poly RE and Yuexiu all reporting higher sales values and volumes in the month; with Gemdale in the lead role with a tripling to Yuan 2 billion ($309 million). Not that the prime investment audience agrees and the property sub-index within the Shanghai Composite is down nearly 4% so far this year. Also negative, is the story that home purchase restrictions may be extended to China’s third and fourth tier cities, according to China Business Journal. More positive, though, is the fact that the nationwide construction of low cost housing (36 million units over five years) should begin by the end of November, reports the Shanghai Securities News. Similarly, the Government has allocated Yuan 5 billion in a special fund to improve the safety of primary and junior high school buildings across the Country.

Have we seen this one before? I hope so; and I was always a sucker for a happy ending.

SHANGHAI COMPOSITE
Today: +0.07% to 2,705.13 at close
This week: -0.84%
May: -5.8%
June (to date) -1.4%
YTD: -3.7%
Since 05/07/10: +14.4%
Since 08/11/10: -14.4%

HANG SENG:
Today: -0.84% to 22,420.37 at close
This week: -2.312%
May: -0.2%
June (to date) -5.3%
YTD: -2.3%
Since 25/05/10 +18.1%
Since 08/11/10: -10.2%

OIL FUTURES: $101.57
GOLD FUTURES: $1545.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4479

ECONOMY
• May’s trade surplus is less than expected at $13.1 billion
• China is an “economic success story”, says Warburg Pincus
• Every boom busts and China will be no exception, says Blackhorse

EQUITIES
• Shanghai stocks to rally 20% by year end
• Deutsche Bank upgrades too
• Car sales dip in April after two stellar years

CASH
• Money market's seven day repurchase rate is on target for its largest weekly increase since January
• Yuan Forwards rise
• Yuan edges lower on PBOC direction; although further appreciation is expected
• Rising Yuan will help rebalance Chinese economy, says IMF

REAL ESTATE
• Developers see sales in May soar, with Gemdale tripling
• China to extend home purchase restrictions as speculative buying increases in lower-tier cities
• Affordable housing push will begin by the end of November, reports Shanghai Securities News

DOMESTIC
• China launches star-studded propaganda movie
• Floods kill 18 and injure over 100 in central China
• Earthquake measuring 5.3 hit Toksun County on Wednesday

INTERNATIONAL
• China to develop economic development zones in North Korea
• CICC’s UK Unit becomes LSE's first Chinese member firm

COMMODITIES
• Baosteel announces a reduction in cuts July steel product prices by Yuan 100-200 per tonne
• Iron ore prices may remain around a two week high, says SSY
• UBS says there is potential for 500 million of new iron ore supply
• Noble Group trumps Exxaro bid for Australia’s Territory Resources
• Miners search far and wide in Australia for new sources of iron ore

Bet on growth

2011-06-08T03:30:00.000-07:00

“Worry less about inflation and more about growth” are the wise words from Garry Evans Head of Global Strategy at HSBC. This is true of many locations, but China in particular; and this from a commentator who thinks that national CPI inflation might well hit 6% this month. But this would be temporary and Garry also believes that it will be 3% by year end.

The more exotically-named Hans Goetti, CIO of Finaport Investment Intelligence agrees and says that the stock market in China has pulled back because of fears of a hard landing; and, to be fair, you can make a case for it. However, he added that a slowdown is a buying opportunity – in fact every growth scare is a buying opportunity. Sure China’s growth is slowing and inflation is rising; and there will be a further rise in both interest rates and the RRR. However, both M1 and M2 have been slowing and China is the only country to make a success out of QE and what sets it apart is the PBOC’s ability to turn the liquidity tap on and off; and it does.

Third in a hat-trick of commentators, is Jim McGregor of APCO Worldwide (who is also a former CEO of Dow Jones China). He said that in financial markets China does not make big moves, but instead it acts in a very, very gradual way.

This is why the PBOC has not been rushed into a further rise in interest rates despite the OECD and the Chairman of Construction Bank saying that it should. The Bank of Communications agrees but also implied that this could be the last hike. Inflation is not out of control and is likely to fall in the second half.

Indeed, after due consideration and ample market prep, though, it is almost inevitable that the PBOC will act this month and raise interest rates. When this does happen, though, the stock market is likely to rise not fall.

In another leg of monetary strategy, the spot Yuan hit a new record high of 6.4759 against the US dollar today. This followed the PBOC setting its mid-point fixing rate also at a record high (6.4766). The Yuan has gained more than 1.7% in 2011 to date and the smart money is that it will rise by a total of 5 to 6% for the year as a whole.

In a bout of sabre-ratting, too, China’s State Administration of Foreign Exchange said the US dollar would continue to weaken. It also warned about the risk of excessive US dollar holdings. While the dollar dipped (including a record low against the Swiss Franc), no one really expects China to do anything about its vast investment in US Treasuries (circa $1 trillion at the last count), save for a new-found diversification (of cash) into Japanese Government bonds. When you are sitting on $3 trillion of FX reserves, you have to put it somewhere; even the PBOC’s mattress is only so big.

Unusually, there was some good news for the property sector today when China Vanke, the Nation’s largest developer by sales, said that May’s revenue jumped 76.4% to Yuan 9 billion ($1.4 billion), which followed April’s dismal gain of 1.3%. In the broader market, too, commercial property transaction volumes across the Country in May rose 150% to a three year high of 3,347. The wonderfully named MOHURD (Ministry of Housing and Urban-Rural Development) has also said that it will renovate 2.65 million dilapidated homes in rural areas; albeit to spoil the party, land sale revenues in 128 Chinese cities dipped 5% year-on-year in the first five months of 2011.

Someone else not joining in the fun was Ben Bernanke with his speech last night and his view that the Fed should maintain record monetary stimulus to boost an “uneven” and “frustratingly slow” US economic recovery. Global equity markets fell. Nonetheless, I leave you the wise words of my former colleague Stephen Roach who is Morgan Stanley’s Chairman. China is not immune to issues and has an awful lot on its plate right now. But it also has a strategy to grow, a commitment to the strategy and the wherewithal to deliver. I would not bet against them in terms of staying the course of pretty impressive economic growth for years to come.

“I would not bet against them” – Stephen Roach, Chairman of Morgan Stanley

SHANGHAI COMPOSITE
Today: +0.22% to 2,750.23 at close
This week: +0.82%
May: -5.8%
June (to date) +0.2%
YTD: -2.1%
Since 05/07/10: +16.3%
Since 08/11/10: -13.0%

HANG SENG:
Today: -0.91% to 22,661.63 at close
This week: -1.25%
May: -0.2%
June (to date) -4.3%
YTD: -1.6%
Since 25/05/10 +19.4%
Since 08/11/10: -8.1%

OIL FUTURES: $98.32
GOLD FUTURES: $1537.90
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4657

ECONOMY
• OECD says China must lift rates by another 50 basis points
• Construction Bank Chairman has said that China needs to raise its interest rates
• China may stop raising interest rates soon, says BoC
• China is likely to avoid Japan growth policy mistakes, says Morgan Stanley’s Stephen Roach

MONEY
• Yuan hits record high (6.4759) as inflation pressures stay elevated
• US Dollar Index hits a one month low as China warns on its value and US Treasuries; the dollar also hit a new all-time low against the Swiss Franc (0.8328)
• Money market rate drops as maturing bills add cash
• PBOC may widen Yuan trading band to 1%, says Standard Chartered
• China purchases of Japan debt reach a new record

REAL ESTATE
• China Vanke’s property sales rise 76% in May pct
• Volume and value of residential land sales fell 5% in first five months; nonetheless commercial property transactions remain strong (+150% in May)
• Apartment sales in Beijing's most expensive complex suspended
• China to renovate 2.65 million dilapidated houses in rural areas

INDUSTRY
• Passenger car sales in May rise by 25 % year-on-year; albeit 11% down on April [CORRECTION]

DOMESTIC
• US Defense Secretary-elect says China appears to be building up military capability on its borders
• Libya Interim Council Foreign Minister visits China
• Floods kill at least 20 in Guizhou and even more are missing, reports Xinhua
• China gives bleak assessment of its battered environment

HONG KONG
• Hong Kong banks lead the way on higher mortgage rates which has eased the boom in home prices
• Property deals in Hong Kong rise 21% on new project sales

COMMODITIES
• Iron ore spot rise as Chinese mill restock
• China dry bulk volumes are slowing, says COSCO
• Rio Tinto says $10 billion Guinea iron ore mine is attracting sovereign wealth funds; Chalco is already an investor with 44.7%; and Baosteel is “very interested”
• Rio says it is on track to produce over 240 million tonnes of iron ore in 2011 (2010: 239 mt)
• ArcelorMittal resumes iron ore production in Liberia
• Kumba may face a strike call in RSA
• Expect short term commodity price slowdown, followed by long term strength, says Macquarie
• Anglo American may sell stake in Brazilian iron ore mine
• Baltic Dry Index sustains two month high due to coal demand
• Owners reduce vessel speeds to try and save margins
• Palmer ends fourth try at $3.6 billion Resourcehouse IPO

Elephant in the room

2011-06-03T02:03:00.000-07:00

Glimpses of large wildlife, for most of us, are reserved for the zoo and, on any given holiday weekend (as it is in China now), this is a popular destination. Chief poacher turned game-keeper, the PBOC, agrees. But every now and again, it has to take Jumbo to the vet; even on a long weekend. Of course, this risks disappointing the punters, but it also means a healthier animal and a healthier zoo.

So it is with monetary policy, and loathe as the PBOC is to raise interest rates this weekend (in what would be the fifth such move since September); it may be best for the Country and its inflation; and long term interest-rate-swaps agree. It is a fine line, of course, particularly as the economic doves say that inflation will subside in the second half (even if it tops 6% before then). The hawks, however, says move now and perhaps by a total of 100 basis points by the end of the year.

The deafening background noise this week, too, has been local authority debt which may run to some Yuan 10 trillion ($1.54 trillion); and how much of it will turn sour. This is particularly pertinent, too, as local authorities earn less from land sales. Credit Suisse says that the average price of land sold this year has fallen 51%. Hand in hand comes concern over central and local government funding of 36 million new homes by 2015, some 10 million of which are planned this year. Should that come to pass, Standard Chartered says that the ‘financing hole’ in 2011 is of the order of Yuan 817 million to 1.4 trillion which will have to come from bank loans.

Similarly, Fitch says - in what I hope is a worse case scenario - that 30% of GDP may be needed to address any “future banking difficulties”. That said, it also points out that China did not suffer the same as the West in the GFC and that China’s 2010 debt-to-GDP ratio was around 19%, according to IMF data. This compares with: the US at 93% last year; Japan at 226%; and Spain at 64%.

It is perhaps surprising then that the Shanghai Composite closed the week off just a touch (0.6%). However it remains negative for the year to date (-2.9%) and is still a “correctional” 10.8% off its April high. Haitong Securities said “there’s limited room for declines now as earnings are still growing, though possibly at a slower pace. There’s some speculation that inflation might peak in the second half of the year and that’ll help improve the market sentiment”. And, it is a sentiment driven market.

The very excellent Jing Ulrich of JPM said something similar i.e. China’s stock market won’t stabilise until inflation peaks; and Government policies may be more accommodating in the fourth quarter after economic growth moderates in the previous three months. In the same vein, Government economist (and former PBOC advisor) Fang Gang said that inflation will probably peak at the end of this month, averting a hard landing for the economy. He also said that commodity prices have stabilised as tighter monetary policies over the past eight months have absorbed excess liquidity.

In the real economy, two PMIs for non-manufacturing or services showed divergent paths in May, while AlixPartners expects the light vehicle market to grow at 12-15% per annum through 2016; plus the Beijing-Shanghai Bullet train is ready to depart (later this month).

Finally, hats off to Li Na who thrashed Maria Sharapova at the French Tennis Open. This is the first time a Chinese player has made the final in Paris.

“Success in sport is the cream atop the geopolitical leadership cake” - Anon

SHANGHAI COMPOSITE
Today: +0.84% to 2,728.02 at close
This week: -0.56%
March: -0.8%
April: -0.6%
May: -5.8%
YTD: -2.9%
Since 05/07/10: +15.4%
Since 08/11/10: -13.7%

HANG SENG:
Today: -1.31% to 22,949.56 at close
This week: -1.01%
March: +0.8%
April: +0.8%
May: -0.2%
YTD: -0.4%
Since 25/05/10 +20.9%
Since 08/11/10: -8.1%

OIL FUTURES: $99.70
GOLD FUTURES: $1533.40
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4494

ECONOMY
• China’s non-manufacturing sector growth shows both a rise and a fall in May according to two PMIs

CASH
• Money market rate declines by the most since March
• Long term interest-rate-swaps rise on interest rate fears
• Yuan strengthens 40 basis points to hit 6.4805 - close to near 17 year high of 6.4777 on Wednesday
• Government economist Fang Gang predicts Yuan may stop rising after two to three years; no hard landing and less interest rate hikes
• PBOC urges “paying attention” local government debt risk.
• China must consider selling municipal bonds, says PBOC
• China to be global banking king by 2023, says PwC

REAL ESTATE
• Property market controls are ‘permanent’
• Shanghai new house prices dip 0.64% in May, says UWin
• Average transaction land prices fell 32% in April; and 51% since the start of the year – which exacerbates local government funding
• 36 million new homes by 2015 is laudable, but question remain about funding

INDUSTRY
• Passenger car sales fall an annualised 1% in May; 11% on month
• China automobile market is set to grow 12-15% per annum through 2016, says AlixPartners survey

DOMESTIC
• Beijing-Shanghai Bullet Train ‘leaves station’ later this month
• China to double solar power by 2015, says Securities

COMMODITIES
• Rio Tinto to study pricing iron ore in Yuan
• Singapore iron ore swap volume hits record in May
• Resourcehouse considers cutting IPO price
• Asian steel prices are weakening, says Steel Market Intelligence
• S&P says there is a risk that a “sudden” slowdown in China could lead to a 75% collapse in commodity prices; nonetheless, its ‘base case’ is much more sanguine
• ArcelorMittal may build $1 billion Brazil plant, says Reuters

Deep doo-doo

2011-06-01T02:54:00.000-07:00

“From a macroeconomic perspective if you don’t understand Chinese property, you probably don’t understand China” quipped Jonathan Anderson, an economist at UBS, in the FT. He also said that construction accounts directly for about 40% of Chinese steel usage. However, when home appliances, property-related infrastructure and other property-dependent sectors are included - it is as much as two thirds. China is broadly driven by property spending.

This means that, while the Government wants to rein back the rate of house price rises (as well as reducing general inflation), it does not want to throw the baby out with the bathwater. This puts into context the five year plan to construct 36 million affordable homes through 2015. It is also encouraging (or discouraging dependent upon your point of view) that house prices rose (+0.5%) for the ninth straight month in May as smaller cities proved resilient to Government restraints, according to SouFun, the Nation’s largest real estate website owner. It also said that prices increased in 76 out of 100 cities including the 'smaller cities' of Shanghai (+0.3%) and Beijing (+0.2%).

More worrying though is that the Government has ordered its banks to conduct stress tests to see how they would be affected if property prices fell by up to 50%. Furthermore, these tests are more stringent and factor in a larger drop in prices than those carried out over the past two years; although the Government was also quick to point out that the stress tests were not a prediction or an indication of its expectations. UBS, however, said “if property prices drop 50% we would be in big trouble; it would mean a hard landing for the economy”. Similarly, Emerging Global Advisers (EGA) added that, in an increasing G2 world (the US and China), a collapse in the Chinese economy would bring about an international depression – not recession. The smart money says this will not happen.

In support of the intelligent cash come two PMIs which show that China’s manufacturing expanded at the slowest pace in nine or 10 months in May, as the Government moves to calm inflation (and despite seasonal factors). First was the one from the Logistics Federation and Statistics Bureau which dipped from 52.9 in April to 52.0 in May, which was the lowest for nine months; with particular emphasis on input prices easing.

“The data suggest continued moderation in industrial activities” said Standard Chartered. But at the same time, the reading was strong enough to alleviate “fears of a sharp slowdown and, thus, marginally increases the chance of a further rate hike in the near term” i.e. the Nation’s fifth interest rate increase since mid-October may come as early as this weekend, which is extended by a holiday on Monday, it being the fifth day of the fifth Lunar month and the Dragon Boat Festival.

Similarly, a separate PMI released today indicated the weakest manufacturing growth in 10 months and a modest dip from April's 51.8 to 51.6 in May. This one comes from a joint survey by HSBC and Markit Economics.

Capital Economics added that “given current growth concerns, there is a risk of market overreaction to what may be a normal seasonal decline. Our view remains that the ongoing economic slowdown is gentle and highly unlikely to lead to a hard landing”.

Finally, China’s money market rate rose for a second day on speculation banks are hoarding cash before a public holiday next week. That is, the seven day repurchase rate gained six basis points to 3.91% at 11.18 in Shanghai, which is the highest since 27 May. “Companies might be holding on to cash before the holiday” said Societe Generale. But, “our view is the central bank will raise interest rates this month to cool the economy further after the less-than-expected fall in the PMI”.

Meantime, the Yuan halted a two day advance today, after trading near a 17 year high, on speculation that China will slow the pace of appreciation after manufacturing data added to signs of cooling. It was at 6.4797 per US dollar at 10.49 in Shanghai, compared with 6.4791 yesterday. The currency reached 6.4780 on 31 May, the strongest level since the Country unified official and market exchange rates at the end of 1993. Elsewhere, Twelve Month Non-deliverable Forwards gained 0.03% to 6.3585 in Hong Kong, a 1.9% premium to the onshore spot rate.

EGA (as above) also said that contrary to mainstream western media views, the PBOC is doing “not too bad a job” in a truly vast economy. Similarly, given the rate of growth which China is experiencing, of course there is inflation. In turn, this has been exacerbated by actual and economic “realities” (weather, food prices etc); and "there is no mathematical plug". Similarly, any monetary tightening has been measured and communicated well to the markets. In my view, too, the same applies this weekend should that interest rate rise come.

“If China gets it wrong we are all in deep doo-doo” – Richard Kang, Emerging Global Advisors

SHANGHAI COMPOSITE
Today: +0.02% to 2,743.97 at close
This week: +0.02%
March: -0.8%
April: -0.6%
May: -5.8%
YTD: -2.3%
Since 05/07/10: +16.1%
Since 08/11/10: -13.2%

HANG SENG:
Today: -0.24% to 23,626.43 at close
This week: -0.24%
March: +0.8%
April: +0.8%
May: -0.2%
YTD: +2.6%
Since 25/05/10 +25.4%
Since 08/11/10: -5.4%

OIL FUTURES: $102.56
GOLD FUTURES: $1531.80
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4410

ECONOMY
• Manufacturing continues to grows at a slow pace
• China raises electricity prices for the first time in a year as short supply begins to impact output

CASH
• Money market rate climbs on speculation that the banks are hoarding cash
• Yuan trades near a 17 year high (6.4780)
• China may assume deleverage some local government debt this summer, says Reuters

REAL ESTATE
• Home prices rose in May for the ninth consecutive month as smaller cities gained
• China broadens stress tests for banks as property fears grow
• Beijing existing home sales may fall to 28 month low in May, says the Securities Times

DOMESTIC
• IPOs in May (22) at the lowest level in 22 months
• China millionaires exceed one million in number
• Four million mainland Chinese (up from 200,000 in 2008) may visit Taiwan next year now that individual ban is lifted

HONG KONG
• Retail sales jump 28% in April - the biggest rise since August 1991

COMMODITIES
• Vale confident in China's iron ore appetite; and high level prices
• Iron ore prices are under pressure for the next three month, says Standard Chartered
• Commodity prices see their largest monthly fall in a year

Vale's CFO Cavalcanti is bullish on China iron ore demand and prices

2011-06-01T02:50:00.000-07:00

Guilherme Cavalcanti, CFO of Vale is on record as saying that China shows no sign of falling demand for iron ore. He was speaking at the WA Business Leaders Forum in Perth, organised by The Australian and Deustche Bank. “22 new cities are being built every year in China. This will keep iron ore prices up”. He also said that his Company aimed “to invest as fast as possible” to meet its plan to double iron ore production capacity over the next five to six years. That commitment to Vale’s $24 billion investment programme for this year, reinforced by the Company's newly installed CEO, Murilo Ferreira, has also helped Vale’s shares start to recover, according to Cavalcanti. He continued, too, by adding that global prices for iron ore were today about $US170 a tonne on the spot market, “way higher than our production costs”; and they will remain at current high levels.

OTHER NEWS:

(i) Iron ore prices are under pressure for the next three month, says Standard Chartered; [Ed: and, yes, that would $5 per ton]

Iron ore prices will face “downward pressure” in the next three months because of increasing volumes from Brazil and weaker global steel demand, says Standard Chartered. There is also a risk of iron ore de-stocking in China. For example, the spot iron ore price for Indian product will be $170 a metric ton in Q3 compared with $175 a ton in Q2. “Softer steel markets in many regions have negatively impacted market sentiment. We expect modest declines in spot iron ore prices in the next three months as Brazil’s exports recover further and demand enters the off-peak season with the start of the summer holidays in Europe and the US”.

(ii) Commodity prices see their largest monthly fall in a year

Commodities recorded their largest monthly fall in a year as the European sovereign debt crisis and Chinese inflation, in particular, led to fears of a global slowdown. In May, the S&P GSCI Spot Index of 24 raw materials dropped 6.8%, the first decline since August and the most since May 2010. Silver led the way with -21%, joined by nickel and crude oil - which were both off around 10%. However, the Index rose 1.2% today. “The May sell-off is a broad-based risk averse move coming from a combination of concerns about Europe’s debt crisis, China’s inflation and US data” said H3 Global Advisors.

Long weekend

2011-05-30T02:19:00.000-07:00

Everyone in the UK (Bank Holiday) and the US (Memorial Day) has a long weekend, including today. For the Chinese people it is a normal working day – at a time when they could do with a break i.e. check out today’s headlines which focus on the prospect of higher interest rates, power outages and, in real estate, a possible extension of the property tax; not to mention the drought and civil unrest in Mongolia.

The known enemy here is Inflation (okay this is better than his depressive brother ‘Deflation’). And, as is well documented, the bulls maintain that he is a temporary visitor, while the bears view him as one who has come to stay. Food prices are, of course, the prime consideration (accounting for 30% of CPI's suitcase) and this won’t be helped by the drought in and around the Yangtze. In fact water levels in the river’s midstream are six metres lower than the same time a year ago, with rainfall only a fifth of what it was in 2010, according to the China Daily. Similarly, China’s meteorological office said on Wednesday that average rainfall in Anhui, Jiangsu, Hunan, Hubei, Jiangxi, Zhejiang and Shanghai, which are China’s major rice producing areas, is the lowest since 1954.

This makes the words of iconic US investor Jim Rogers all the more pertinent. “I don’t mind if China has civil war, epidemics, panics, depressions, all of that. You can recover from that. The only thing you cannot recover from is water. If China doesn’t solve its water problems than there’s no China story”. That said, Rogers (who is not everyone’s cup of green tea) also acknowledged that the Nation is spending large amounts of money to solve this problem.

The Shanghai Composite also dipped again today (-0.13%) for the eighth in a row, which is the longest losing streak (-5.7%) since December 2008. With one trading day to go, too, the month of May is now 7.1% in the red (and they say April is the cruellest month) and 11.4% off its 2011 peak on 19 April; not to mention being 2.5% negative in 2011 so far. Today, developers were in sharp focus, too, as Xinhua reported that a property tax trial in two or three principal cities may be expanded nationwide. Similarly, a number of academics at a weekend conference talked about a fall in house prices of 10% or more. No surprise then that the Property Sub-index within the Composite fell 1.5% (to 3334.5) including China Vanke, the Nation’s number one developer, at a 10 month low (-1.3% to Yuan 7.80).

The money markets had some better news, if curate-like. The Yuan touched 6.4858 to the US dollar on 26 May, the highest since 1993. Many commentators claim that China’s currency could be used to ease Inflation’s temper. These include Tim Geithner and a number of his countrymen. And it was significant, at the weekend, that the US Treasury stopped short of branding China a ‘currency manipulator’; despite adding that the progress on letting the Yuan rise was “insufficient”. The cynical view here, too, is that the report was deliberately released on a holiday weekend so as not to attract too much attention.

“If we are facing in the right direction; all we have to do is keep on walking” - Buddhist Saying

SHANGHAI COMPOSITE
Today: -0.13% to 2,706.36 at close
Last week: -5.20%
March: -0.8%
April: -0.6%
May (to date): -7.1%
YTD: -3.6%
Since 05/07/10: +14.3%
Since 08/11/10: -14.6%

HANG SENG
Today: +0.29% to 23,184.32 at close
Last week: -0.35%
March: +0.8%
April: +0.8%
May (to date): -2.3%
YTD: +0.7%
Since 25/05/10 +22.1%
Since 08/11/10: -7.1%

OIL FUTURES: $99.97
GOLD FUTURES: $1536.30
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4286

EQUITIES
• Jim Rogers says China’s number one issue is water
• Stocks fall and rise on tightening concerns; led by developers
• Societe Generale is “underweight” on China stocks

ECONOMY
• Copper gains on optimism about Chinese demand
• Home appliance sees sharp fall in the rate of growth in April; less so for first four

MONEY
• Yuan completes second sees weekly gain
• US does not name China as a currency manipulator

REAL ESTATE
• Home prices likely to fall by more than 10% this year

DOMESTIC
• Emergency response to drought
• Drought in China raises worries about global grain supply
• Non-infectious chronic diseases become major health threat, claiming 85% of deaths in China
• China to change mine rules after Mongolia unrest

INTERNATIONAL
• Chinese top legislator calls for deeper business cooperation with South Africa

China's steel demand to rise 12 to 25% by 2015

2011-05-30T02:17:00.001-07:00

Steel demand in the World’s biggest consumer, may rise by as much as a quarter by 2015 compared with demand last year, according to a projection from the China Iron & Steel Association (CISA), which represents producers. Consumption may increase by between 12 and 25 % from the level in 2010 to as much as 750 million metric tons in 2015, according to Luo Bingsheng, Deputy Party Secretary of the Association. He was speaking at a conference in Shanghai.

China’s steel production in 2011 will exceed 680 million tons, added Li Xinchuang, Deputy Secretary-General at CISA. This estimate is based on a forecast that China’s economy will grow by more than 9%. China’s apparent steel consumption, which includes metal for stockpiles, averaged 17% a year from 2006 to 2010.

CISA has also suggested that the Shanghai Futures Exchange list futures for medium-to-thick steel strips so producers and users can hedge price risks. Some 43% of the steel made in China is distributed by traders, which make prices more volatile, Li added.

MORE NEWS
Steel makers profits dip in first four months of 2011
China’s 77 largest steelmakers’ aggregate profit fell 2.1% to Yuan 32.9 billion between January and April, says CISA. Similarly, the average margin was only 2.9% because of high raw material costs. These mills generated combined profit of Yuan 90 billion last year.

The Inflation Lotto

2011-05-27T02:55:00.000-07:00

Sales of lottery tickets in China rose by an annualised 33.3% in the first four months of the year to almost Yuan 65 billion ($10 billion) with the official explanation being the popularity of new quiz-type lottery games and trial sales on-line.

Gambling by China’s Government is less endemic. It tends to adopt a more pragmatic and empirical approach (some commentators call this ‘trial and error’). Nonetheless, in what has been a difficult week (the worst drought in 50 years, probable power shortages, explosions and a falling equity market), it is tenable that Hu, Wen and Zhou must be longing for a win. However, the only betting success for the central authorities, at this time, is the ‘Inflation Lotto’.

According to Huachuang Securities the inflation rate may increase to as much as 5.5% in May, which follows 5.3% in April, the fastest pace since 2008. Huachuang says that this is being driven by vegetable prices in southern China which has been impacted by the drought. Vegetables account for about 20% of food costs which, in turn, makes up about 30% of consumer prices.

Other commentators believe that Q2 could well be the peak for inflation and that it may then subside, a view which could also keep further interest rate rises at bay. However the Shanghai Composite had its biggest weekly drop (4.7%) this week since June last year. This also takes May’s deficit (with two trading days to go) to 6%, which is also the worst June 2010; and for the year-to-date, the short-fall is now 2.6%. Investors are worried that the tightening is overdone and concerns have widened to a slowdown in earnings and economic growth – and not just inflation, says Jingxi Investment Management. “The market is still trying to find a bottom”. ICBC Credit Suisse concurs.

Meantime, the Lex Column in the FT says private investors, who dominate the 159 million registered trading accounts in China, see property as a better bet for returns right now than the stock market. Soufun also said that house prices in Shanghai and Shenzhen rose in the week ending 22 May (although they declined in Guangzhou). Note, too, that the property tax introduced in two or three conurbations has had little impact in reality; in Chongqing, for example, it has raised just $120,000 since January.

For is part, Barings Asset Management says stocks may rally after the central bank ends its tightening policy, possibly by as soon as the end of the third quarter. “Once it peaks, the market will have a very strong bounce” and “investors will come back to China at the end of third quarter or fourth quarter”. Barings likes consumer and health care companies but says investors should wait before investing in “cheap” property and banking stocks. In the same vein, HSBC says that share prices in China could rise by 20% by year-end, while UBS sees no hard landing. Similarly, while Goldman Sachs would not rule out a correction of up to 5 to 10% near term, triggered by earnings per share cuts, it would buy on such dips given low earnings risks, valuations and the likely policy inflection. Goldmans expects inflation to peak in June and forecasts normalisation of policy sometime in Q3 2011. It has, however, downgraded steel, aluminium and industrial stocks to “underweight” from “neutral,” while keeping property and bank shares as top picks.

Industrial profit growth also shows that the medicine is working, as it slowed in the first four months of the year to (a still remarkable) 29.7% - down from 32% a year ago (and 34% in January and February). And, China is ranked first among 22 emerging Asian economies as the country most likely to maintain steady and rapid growth over the next five years, according to the Bloomberg Economic Momentum Index for Developing Asia (India is two).

The money market agrees and the repo rate fell for the first time in a week today (off 64 basis points to 4.37%) as Citigroup and Societe Generale forecast that Yuan 550 to 600 billion ($85-92 billion) could flow into the market by way of maturing bills and repurchase agreements. Finally, even the Yuan is playing ball as it touched its highest level (6.4858 to the US dollar) since July 1993.

“You know you're gonna live through the rain. Lord you gotta keep the faith” – Jon Bon Jovi

SHANGHAI COMPOSITE
Today: -0.21% to 2,709.95 at close
This week: -4.27%
March: -0.8%
April: -0.6%
May (to date): -6.0%
YTD: -2.6%
Since 05/07/10: +15.8%
Since 08/11/10: -13.4%

HANG SENG:
Today: +0.95% to 23,118.07 at close
This week: -0.35%
March: +0.8%
April: +0.8%
May (to date): -2.5%
YTD: -1.4%
Since 25/05/10 +21.8%
Since 08/11/10: -7.4%

OIL FUTURES: $100.64
GOLD FUTURES: $1526.80
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4202

HEADLINES

ECONOMY
• Industrial profit growth slows
• China is ahead of India as the most likely to grow
• China will invest some $955 billion on transport infrastructure by 2015; plus $615 billion in water conservation projects through 2020

MONEY
• Money market rate declines by the most in a week as bills mature
• Yuan heads for a weekly gain and hits strongest level (6.4858) since July 1993
• China FX reserves climb by $138 billion in Q1

EQUITIES
• China still offers value; and no hard landing says UBS
• A further 5 to 10% correction in China share prices is likely, says Goldman Sachs
• Slumping Chinese stocks may extend their decline, says ICBC Credit Suisse AM
• Anhui Conch is a “buy” on affordable housing build

DOMESTIC
• Explosions in Jiangxi Province kill two people, including the bomber
• Worst drought in 50 years begins to impact Shanghai
• China's April lottery sales up 32.2% in April; and 33.3% in first four months of 2011

REAL ESTATE
• China faces difficulty extending pilot property tax, says senior housing official
• Jim Chanos is even more bearish on Chinese property

INDUSTRY
• Coal production up 11.1% in first four months
• Automobile sales may fall 10% this year, says China Automotive
• Toy prices rise as wages in China increase

INTERNATIONAL
• China faces losses on $18.8 billion of Libyan Contracts, says Economic Weekly
• North Korea’s dependence on China for trade rises; as Kim completes his third visit in a year

HONG KONG
• Hong Kong’s April inflation accelerates to a 32 month high on food and housing

Iron & steel special: "up and down"

2011-05-27T02:46:00.000-07:00

It’s been a week of high and low Fe content, with Goldman Sachs being firmly in the former. In fact it single-handedly returned positive sentiment back to commodities with a research note: “we now believe that the risk/ reward once again favours being long commodities. We are shifting back to a near-to medium-term overweight recommendation”.

At the other extreme was the FT’s Lex Column. It said that as long as China “continues its recent pace of development, its share of global steel demand will probably stay at around the current 45% (by comparison, it consumes only 10% of the World’s oil). In that case, the growth rate of global steel production could well stay at the 5% it has registered for the last decade. “The construction of Chinese infrastructure has lifted the global intensity of steel use to levels not seen since the post-War reconstruction of Europe and Japan ended in the early 1970s. That golden period was followed by two decades of minimal growth in global steel production – and dismal profits. “When China is built out, its steel demand should fall. Chinese producers, left with spare capacity, would then be tempted to export into an already well supplied world. That implies another bad decade or two for the industry”. For the record, the FT says that the World currently consumes nearly 0.034 kilogrammes of steel per unit of global GDP. This compares with nearly 0.036 in 1960 but as low as 0.022 in 1990. Food for thought.

Somewhere in between these two, is the inevitability of power cuts which will cause a fall in Chinese steel production. For example, Deutsche Bank says the shortage may reach 35 gigawatts or 3.7% of the Country’s capacity last year; and 35 gigawatts is enough to supply 35 million US households. In turn, this means that production has risen in the first four months of the year by 9.1%; and in the month of April China accounted for 47% of World steel output. As a result, Steel Market Intelligence says inventories are rising.

Of more concern is Mirae Securities view that China steel prices will fall 10% this summer. Similarly, spot iron ore prices have fallen 5.9% in three weeks to $173 at Tianjin; and this despite contract iron ore prices for Vale and Rio in Q3 expected to be little changed (i.e. as much as down 1.2% for Rio).

Back to the ‘highs’, though, Baosteel is doing its bit by finally winning planning permission for a new 10 million metric ton mill in Zhanjiang in Guangdong. As a result, too, some 15 million tons of obsolete capacity will be shut down. Baosteel also, enigmatically said it will seek to consolidate steelmakers in Guangdong; albeit no details are, as yet, forthcoming.

Finally Vale is not bearish (and nor am I) as it invests $2.9 billion to increase the capacity of the Ponta da Madeira terminal in northern Brazil, making it the largest port in the Country by volume. Similarly, Exxaro Resources, a South African coal miner, has made a rare bid ($129 million) in iron ore, with the target being the Aussie miner Territory Resources. This is part of Exxaro seeking to meet its goal of producing 10 million metric tons of iron ore a year. And, finally, Glencore continues to seek further off-take deals in iron ore and may well extend its agreement with London Mining in Sierra Leone.

“For every low there is an equal but opposite high” - Norman Cousins

HEADLINES

IRON ORE
• Vale will hold contract iron ore prices, while Rio dips, says Platts
• Iron ore prices fall 5.9% in three weeks to $173
• London Mining in talks with Glencore on iron sales
• Exxaro offers $130 million cash for Australian iron ore producer, Territory Resources

STEEL
• Steel inventories in China may be rising, says researcher Steel Market Intelligence
• China’s steel production rises 9.1% in first four months
• China’s steel output may fall from June as a resukt of inevitable power cuts, says Platou Markets
• Chinese steel prices to fall 10% this summer, says Mirae
• Baosteel expects to win approval for Zhanjiang Project in Guangdong this year
• FT’s Lex Column on steel and China: warns of possible contraction

SHIPPING
• Vale to spend $2.9 billion to set up Brazil’s largest port
• Capesize rents gain for a fifth day following speculation that vessels have been withdrawn

Tick, tock

2011-05-23T03:29:00.000-07:00

“You Americans, you always look at your watches. We look at our calendar” said, a Chinese education minister to the Carnegie Corporation of New York. I am of neither nationality, but I side with the education minister, especially when both the Shanghai and Hong Kong stock exchanges fell by more than 2% today; and in HK it seems worse given that the points fall was almost 500. Both domestic indicies are now negative in 2011, too.

No prizes for guessing why – as all eyes are on Europe’s sovereign debt issues. Similarly, S&P has said Italy’s credit rating is at risk (the outlook has slipped from stable to negative), while Fitch has cut Greece’s to B+, four steps below investment grade (down from BB+).

“The biggest concern about Europe is the risk of contagion and of credit markets drying up globally” said Platypus Asset Management. “The memory of the global financial crisis is fresh in everyone’s mind, and everybody’s preference is that we don’t go there again. Greece has a disproportionately large ability to cause a lot of collateral damage. Credit is a very important mechanism for quickly transmitting malaise around the world. If Europe’s problems affect credit markets generally it has the ability to derail the global economic recovery”.

Meantime, in China activity is moderating but there will be no hard landing. So says HSBC/Markit as its ‘flash’ PMI for manufacturing eased from 51.8 to 51.1 (the actual one is out on eight days time). Overall, too, the Index suggests that factory output is growing at 13% per annum and GDP at 9%; which is all very nice to be getting on with. The World Bank concurs with its higher forecast for China’s GDP of 9.3% this year (up from 9.0% in March and 8.7% last November); albeit this compares with 10.3% last year. The Bank describes this as “healthy” but it is worried about inflation and urges the Chinese authorities not to ease tightening just yet. The money markets agree and the seven day repo rate has risen for the third day (+62 basis points) to 4.7%. This is despite the general view, that while inflation will continue to rise this quarter (perhaps to as high as 6%), it will moderate in the second half of the year.

Meantime, the Yuan has been perky but lacks international maturity (and will continue to) i.e. after hitting a new high of 6.4948 to the US dollar on 11 May, it dipped 15 basis points this morning to 6.4998.

I don’t think that China wants to raise interest rates again or see a dramatic rise in the value of its currencies. Of course, it will increase rates if needs must, even temporarily; but the currency is a different story. Note, too, that the World Bank has underlined the fact that exports as a share of GDP fell to 29% last year, which compares with 39% in 2006. The economy is changing. In the same vein, Nomura says Chinese stocks will trade in a “range” until the middle of the year amid concerns over inflation and slowing economic growth. But it remains “optimistic” on the market for the full year, saying the economy will likely enter a “soft landing”.

“Oh! Do not attack me with your watch. A watch is always too fast or too slow. I cannot be dictated to by a watch” - Jane Austen

SHANGHAI COMPOSITE
Today: -2.93% to 2,774.57 at close
Last week: -0.44%
March: -0.8%
April: -0.6%
May (to date): -4.7%
YTD: -1.2%
Since 05/07/10: +17.4%
Since 08/11/10: -12.2%

HANG SENG:
Today: -2.11% to 22,711.02 at close
Last week: -0.33%
March: +0.8%
April: +0.8%
May (to date): -4.2%
YTD: -1.4%
Since 25/05/10 +19.6%
Since 08/11/10: -9.0%

OIL FUTURES: $97.26
GOLD FUTURES: $1509.11
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.3996

ECONOMY
• China’s growth in manufacturing hits 10 month – but there will be no “hard landing”, according to ‘flash’ PMI from HSBC/Markit
• World Bank raises China’s 2011 GDP forecast from 9.0 to 9.3% and urges more tightening
• Global economy to expand just over 4% this year, says Barclays and Morgan Stanley; down from 4.9% in 2010
• China is unlikely to allow a “jump” in the Yuan’s value, says NERI’s Fan Gang; and inflation will ease in H2

CASH
• Money market rate rises for third day as Companies conserve cash
• Yuan dips after record 6.4948 on 11 May
• China wants its banks to maintain leverage ratio of at least 4%
• Offshore Yuan trading tops $1 billion a day for the first time
• PBOC injects a net Yuan 67 billion into banks via money market

REAL ESTATE
• Stale bear Andy Xie claims that Chinese real estate prices will drop by 50% in three years

ELECTRICITY
• China’s power capacity to rise 77% by 2020, says State Grid

COMPANIES
• Anhui Conch is raising cash at just over 5%
• A majority of Chinese flooring companies face preliminary US duties of as much as 83%

PEOPLE
• Artist Ai Weiwei has evaded “a huge amount” of taxes, says Chinese police

HONG KONG
• HKMA may seek to slow down the growth in Yuan deposits, which is at a record
• City’s banks may moderate credit growth

COMMODITIES
• China is now largest market for gold bar and coins; although India remains largest consumer overall
• Iron ore prices steady as buyers wait
• Iron ore prices may fall on Chinese power shortages, says Deutsche
• China’s daily crude steel output up 0.29% in first 10 days of May
• Glencore is unperturbed about the slide in commodity prices
• Glencore buys iron ore in Brazil
• Chinese shipbuilder examines plans to build the World’s largest commodity carrier
• Quality issues raised with Indian iron ore
• Iron ore “bubble” looms, says Baosteel

Iron ore boom or bust

2011-05-20T14:19:00.000-07:00

TW COMMENT: it has been a week of mostly positive news flow for iron ore (Japanese demand, a 2011 supply shortfall, firm prices and a forecast 12% rise in China’s steel production this year). Plus, we have seen the spectacular debut on public markets of commodities trader Glencore (market cap. $59 billion). It is thus interesting that Baosteel’s Chairman has chosen now to make bearish comments on the future performance of the iron ore sector; and there could well be a ‘political’ element at work here? Similarly, Macquarie’s forecasts for what might happen to prices in 2014 (i.e. broadly halving) are just that - forecasts; particularly as it is also predicting a 36% rise in seaborne irOn ore volumes by 2016.

BAOSTEEL CHAIRMAN IS CAUTIOUS
The iron ore market has risen to “bubble” levels which will burst as new mines create oversupply of the steelmaking raw material, according to China’s second largest steek maker Baosteel Group. “There is a bubble in this market, many are gambling”, making acquisitions and investment expensive said Chairman Xu Lejiang in an interview in Shanghai, without saying when prices would drop. “Everyone who has money is rushing in to invest in iron ore”.

Vale, Rio Tinto and BHP Billiton, the three biggest suppliers, plan to spend $45 billion on mines. “The reason the big three keep spending is that they probably think growth in India, Brazil, Russia and South Africa will be sustained, and also because they believe the return on their input would beat those blind investments” by smaller rivals, continued Xu. The biggest losers from the new mines may be the speculative companies which have not yet started production and their investors, he added. “Some investors are simply making money by trading the iron ore projects before seeing actual output. Iron ore prices will definitely fall at some point because the supply demand situation will have a turnaround”.

Demand from steelmakers in China has spurred an almost threefold jump in the cash price for 62% iron ore delivered to Tianjin since 21 November 2008 (when data became available) according to the Steel Index. It was $175.30 per ton on 19 May. Producers valuations have also soared and the Bloomberg Global Iron Ore Mining Index of 30 iron ore companies have surged four fold since 2008. “In Australia, South Africa and America, I’ve seen a lot of investors whom only ‘dig’ iron ore on the stock market, they will never see physical output” from their mines, said Xu. The average profit margin of Chinese steelmakers was 3.5% in the 2010, the lowest of any industry, because of overcapacity and rising raw material costs, according to the Chinese Government. This is about a tenth of the margins the largest iron ore miners make, added Xu.

Macquarie Group (18 May) says iron ore may trade between $150 and $190 a ton for the next three years before declining to a long-term average of $80 a ton after 2014 as demand growth in China slows. However, global seaborne supply may increase to 1.48 billion tons by 2016, from a forecast 1.09 billion tons this year.

BHP will spend $6.6 billion expanding output in Western Australia to more than 220 million metric tons a year. Meantime Rio Tinto is spending $14.8 billion to boost output by 50% to 333 million metric tons and Vale plans to invest $24 billion this year alone on expansions.

Iron ore supply may outstrip demand “sooner than expected,” as production increases after record prices spurred investment in mines, in Xu’s view (earlier he had orecast the market to move into surplus in 2014).

China has been encouraging State-owned steelmakers to invest in overseas resources to cut their dependence on the three miners. Baosteel is “very interested” in participating in Rio Tinto and Aluminium Corporation of China’s Simandou iron ore project in Guinea, said Xu. Similarly, Wuhan Iron & Steel has invested in eight projects in Canada, Brazil, Australia, Liberia and Madagascar.

Exploding watermelons

2011-05-18T03:40:00.000-07:00

An agrarian minefield has been discovered in Jiangsu Province in eastern China where nearly all the watermelons on a 700 mu site (around 115 acres) have burst open. This was caused, apparently, by a chemical known as forchlorfenuron which is designed to prompt plant growth, but clearly over-did it.

The Chinese authorities have been doing the opposite in the housing market where they have used legislative weed-killer to constrain growth in prices. And, depending upon which commentator you talk to, the crop protection is either working or it isn’t. This is compounded by the fact that the Government has re-cast the calculation of data and where efficacy is questioned.

My view is that the Government has been successful in slowing down the rate of house price inflation, which was its intention i.e. it never wanted germination to cease. But it is a correction not a collapse, given underlying demand and wealth

For example, in April, new homes in nine cities out of 70 recorded a dip in price, while five were flat compared to March. All increases in price, too, were smaller than 1% on a month-on-month basis and 26 cities had smaller rises than March. Year-on-year, three cities had a decline in prices (versus two in March), while 52 witnessed a slowing rate of gain. For the second-hand market, 16 cities recorded an easing in prices, with 13 flat compared to March. Three more cities showed month-on-month declines. On a year-on-year basis, eight cities saw a drop (versus three in March), while 45 slowed. Similarly, sales by floor space in April fell 9.9% from a year earlier, the first drop since September. Overall, too, house prices increased at a faster pace in smaller cities and slowed in major ones, with the exception of southern manufacturing hubs. Month on month for example, new home prices in Beijing rose by just 0.1% while in Guangzhou the rise was +0.7% for the month.

In the money markets there has been a similar result for the central authorities. After the fifth increase in banks’ reserve ratio requirement or RRRs, the seven day repurchase rate declined the most in almost three months this morning (by 138 basis points to 3.21%) on speculation a cash squeeze will ease as banks comply.

Foreign direct investment or FDI in China is also alive and well and in April it rose 15% to $8.5 billion, after a 33% gain in March; and, for the first four months, the total was $38.8 billion, a gain of 26%. Foreign companies are targeting consumers in China as earnings rise and families move to cities from rural areas. China is aiming to increase urban and rural per capita net income by more than 7% a year in real terms over the next five years, according to the National Development and Reform Commission (March 2011). Similarly, Premier Wen aims to shift economic growth to a model which is driven by consumption and is less reliant on exports. “Global investors are still attracted by China’s growth story” said Societe Generale. “The question is what the Chinese Government is going to do about the capital inflows which are putting pressure on the Yuan”. Note, too, that last month, work began on the $4.4 billion Shanghai Disney Resort.

In fact investment spending in emerging markets - overall - is set to outpace expenditure in developed economies for the first time ever in 2011 as a surge in infrastructure supports global growth, according to Citigroup. In turn, this forms part of global fixed investment which will reach $23.2 trillion by 2016, an increase of 61% from last year. Herein, urbanisation in particular is prompting developing countries, including China and India, to spend on roads, power stations and water systems; and putting this in context, McKinsey brilliantly quantifies that China will need to add residential and commercial floor space equivalent to building New York City every two years, to keep pace with population growth. The Nation will also lengthen its rail network to 120,000 kilometres (75,000 miles) from 86,000 by 2015; and its roads will surpass those in the US within five years, from 70% of the size today. Similarly, the Country’s urbanisation ratio is rising towards the level of developed nations, to 63% longer term from 47% now. Going the other way, too, China will also invest more than $1 trillion abroad by 2020, according to the Asia Society and Woodrow Wilson Center for International Scholars.

As a result of this investment, demand for copper, steel and other commodities may very well “provide a floor” beneath raw material prices, according to Principal Global Investors. In addition - and based on one of my favourite adages: ‘it is a thin wind that dries nobody’s washing’ - estimates for spending in Japan in the wake of March’s tragic earthquake and tsunami are of the order of $300 billion, of which some 10% will be spent on steel products, says ANZ. As it rebuilds, Japan’s consumption of steel may climb 8% annually in the next three to five years – and at least half would be imported. “Benchmark that against virtually flat growth in the last 10 years in Japanese steel production and we are talking an additional 10 million tons of steel each year” continues ANZ. In the same vein, Government forecasts say China’s crude steel output may rise 12% this year to 700 million metric tons – up from an earlier estimate of 660 million tons. What is more global seaborne supply of iron ore will fall about 15 million tons short of demand this year, compared with an 11 million ton surplus in 2010, according to Macquarie. It, thus, predicts that Chinese spot prices will probably jump by more than 15% this year. So much for a commodities bust.

“China will need to add residential and commercial floor space equivalent to building New York City every two years, to keep pace with population growth” – McKinsey

SHANGHAI COMPOSITE:
Today: +0.70% to 2,872.77 at close
This week: +0.06%
March: -0.8%
April: -0.6%
May (to date): -1.3%
YTD: +2.3%
Since 5 July 2010: +21.5%
Since 8 Nov. 2010: -9.1%

HANG SENG:
Today: +0.48% to 23,011.14 at close
this week: +0.14%
March: +0.8%
April: +0.8%
May (to date): -3.0%
YTD: -0.3%
Since 25 May 2010: +21.2%
Since 8 Nov. 2010: -7.8%

OIL FUTURES: $98.09
GOLD FUTURES: $1491.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4251

ECONOMY
• Foreign Direct Investment in China climbs 15%
• Limits on electricity usage may reduce Q2 GDP growth by 0.5%, says Shanghai Securities News
• Chinese tourists set new daily record in Hong Kong at 122,893 on the 30th of April

REAL ESTATE
• House prices rise in April as commentators debate their strength
• Value of home sales fell 21% in April, while volume eased 9.9%
• The calculation of house price data has changed (so be careful)
• Reuters bullish on house prices; estimates 4.3% annual gain in April
• Soufun says house prices in April rose 0.4%
• Land sales fall at four major cities
• Insurance companies to be allowed to invest in affordable housing
• China stops developers financing through real estate trusts
• Evergrande Real Estate shares climb in Hong Kong trading on annoucement of Grandday Stake sale
• MGM plans 30 hotels in China to tap growing luxury travel demand

MONEY
• China money market rate drops on new reserve ratio requirement
• China cuts US Treasury holdings as Democrats and Republicans argue on national debt limits

MARKETS
• Investment in emerging markets is set to exceed that in the developed world for the first time

IRON & STEEL
• Tragic Japanese boost for iron ore and Chinese steel exports
• 15 million ton of global iron supply this year
• China steel output to rise by better than expected 12% this year
• Cheaper dry cargo shipping by 67%

Back on line

2011-05-16T01:51:00.000-07:00

The Chinese say that “it is better to do a good deed near home than to go far away and burn incense”; and I have been far away – some 20,000 kilometres from London in fact. Thank you, too, for all those cards and letters (as the late, great Dean Martin used to say).

During my blog-interregnum, I was first in China and then marketing in Australia – before some ‘down time’ in the nation of my birth New Zealand (aka Godzone); not to mention, brief sojourns in two City states (Hong Kong and Singapore). For the record, the number one issue in all locations was the cost of living. Concern about the housing market is also omnipresent and the prevailing political climes continue to morph to centre/right.

What I love about China, though, is the energy and industriousness of its people and there is a palpable vitality on the street. Nor does it take long to appreciate that there is a wonderful education system at work. It is, too, a truly vast country and increasingly the big boy on the global block. Okay, there is some local difficulty with inflation right now (in April it was 5.4%) and the stock market has fallen 200 points or so since mid-April. (Ai Weiwei and 99 other liberals also remain under spurious arrest).

But the very wise Jim O’Neil, Chairman of Goldman Sachs Asset Management says that his strongest hunch is that China’s inflation may be close to easing, meaning the Chinese stock market may go crazy in the second half. Similarly, the Government will stop tightening policies as price gains moderate. “China’s economy is probably slowing down more than people realise” said O’Neill, who coined the acronym BRIC for the economies of Brazil, Russia, India and China. This means that GDP may slow to about 8% annualised in June through December after 9.7% in Q1. The PBOC has raised interest rates four times since mid-October and, in 2011, has increased bank reserve requirements five times to rein in credit growth. The latest of these (+0.5%) kicks in on Wednesday at which point the large banks will be on 21% and this alone extracts Yuan 370 billion ($57 billion) of lending capacity.

Elsewhere the New York based Conference Board Leading Economic Index for China increased 1.0% in March to 157.0 (2004 = 100), following a 0.3% increase in both February and January. Four of the six components contributed positively to the index in March. “After two months of small increases, the large increase for China in March points to continued economic expansion in 2011. Combined with an up-tick in the coincident economic index (+1.6% to 199.6), the leading indicators suggest that risks of a hard landing for China’s economy in 2011 may be easing. However, growth will likely remain slower than during the second half of 2010. In March, improving consumer expectations and construction activity offset slack in the manufacturing supply chain and declining export orders”.

Real estate
Turning to real estate, it is hard to believe when travelling in China - outside of Beijing and Shanghai - that there is a property bubble. Furthermore, property development investment rose 34.3% in the four months January through April to Yuan 1.33 trillion. Similarly, by volume, China’s newly started property rose 24.4% to 249 million square metres in the first four months of the year. Okay, the value of home sales in the month of April declined 21% as Government measures impacted, but it was still 11% ahead in the first four months of the year: January through April. Similarly, house prices rose 0.4% in April for the eighth consecutive month. Finally, new home construction climbed 21% in the first four months to 440.1 million square metres (although in Beijing sales volume fell 32% to 2.6 million square metres).

More broadly, however, there are concerns that the Chinese Government’s plan to massively increase the supply of social housing will negatively impact developers’ margins. It is committed to building 36 million new homes in the social housing sector over the next five years; and about 10 million of those homes are planned for this year and next, almost twice the 5.8 million target for 2010. However, in my view, the public and private sectors should be able to work together here. For example, the Government can not physically do all the work on its own; and 36 million houses will only house 80 million people from a population of 1.3 billion.

Commodities
Turning to the vexed issue of natural resources, there has been a serious wobble in both price and expectation. The former, of course, can benefit China although in April imports of iron ore fell 11% - from March - to 52.9 million metric tons; they were also 4.4% lower year-on-year. However, import prices at Tianjin Port rose 5.3% in April. Similarly, in the week to 3 May, the price of iron ore with 62% iron content delivered to the Tianjin rose 2.1% to $182.60 per metric ton, the highest level since 14 April.

In terms of the domestic steel industry there are a number of issues, not least profitability in the face of soaring iron ore prices and coal. For example, the price of imported iron ore to China rose 54.4% in Q1. Electricity shortages are also now prevalent once more and the Government aims to cut some 26 million tons of outdated steel production capacity this year.

Taking all this on board, the China Iron & Steel Association says growth in Chinese demand for steel may ease to a rate of between 2.6 and 4.6% annually through 2015 as the economy slows. That is GDP will grow at an average 7% a year through 2015 from 11.2% in the past five years. Growth in apparent steel consumption, which includes stockpiles, averaged 17% a year from 2006 to 2010.

My final point here would be to say that I am not a bear on natural resources. Okay, there had to be a correction on price (and there has been) but demand remains inexorable even with the US and Japan out to lunch. Similarly, the appetite to secure supply (especially of iron ore) remains huge, with Severstal and ArcelorMittall (to name but two) continuing to invest here. Look out, too, for the imminent - and staggering successful - $11 billion IPO for Glencore, one of the World’s largest commodity traders. In addition, there could well be a bonus on dry cargo shipping rates, too, as fleet capacity rises 16% this year while annual volumes of water-borne iron ore rise 7%.

“Travel is fatal to prejudice, bigotry, and narrow-mindedness” - Mark Twain

SHANGHAI COMPOSITE:
Today: -0.77% to 2,849.07 at close
Last week: +0.25%
March: -0.8%
April: -0.6%
May (to date): -2.1%
YTD: +1.5%
Since 5 July 2010: +20.5%
Since 8 Nov. 2010: -9.8%

HANG SENG:
Today: -1.36% to 22,960.63 at close
Last week: +0.51%
March: +0.8%
April: +0.8%
May (to date): -3.2%
YTD: -0.3%
Since 25 May 2010: +20.9%
Since 8 Nov. 2010: -8.0%

OIL FUTURES: $98.10
GOLD FUTURES: $1496.00
(new ‘immediate delivery’ high of $1577.40 on 2 May 2011)
EURO/$ SPOT: 1.4123

FORECASTS
• Goldman Sach’s O’Neill says China inflation won’t be a problem as growth cools
• Deutsche Bank’s Jun Ma says China is more cautious on raising interest rates
• China moves on reserve ratios again but interest rate rises may be more limited
• Conference Board indices point to continued economic expansion in China and no hard landing

REAL ESTATE
• Property development investment rises 34.3% in January through April to Yuan 1.33 trillion
• The volume of newly started property in the four months January through April rises by 24.4%
• The value of home sales in China in April declined 21% on Government measures, but it was still 11% ahead for first four months; house prices also rose 0.4% in April for the eighth consecutive month
• Beijing housing sales in January to April drops 32%
• China’s plan to build record numbers of cheap housing may squeeze developers’ profits, says RBS and others

MONEY
• China orders banks to set aside more cash

ECONOMY
• China inflation spreading beyond food suggests that Wen will persist with tightening
• China inflation of 5.3% in April
• Wang calls for China growth model shift amid trade surplus
• China has bigger than forecast surplus on record exports

INVESTMENT
• Poll says China Yuan to be convertible by 2016
• Investors are less optimistic about China; but it still ranks number three Worldwide
• Investors shifting to cash from commodities

BONDS
• Yuan-denominated bonds continue to be popular in HK
• China buys most Japanese bonds since 2005

INDUSTRY
• Nation may face and electricity shortage
• Car sales slow

HONG KONG
• Hong Kong economy expands a faster-than-forecast 7.2% in Q1
• Hong Kong land sales beats estimates

IRON & STEEL

(i) domestic
• Imports of iron ore fall 11% by volume in April from previous month and 4.4% from a year earlier; but prices rise 5.3%
• Iron ore prices at $182.60 per ton on 3 May and expected to hold
• Chinese power cuts may curb steel production
• China steel demand growth may ease to 4.6% as economy slows; as Q1 imported iron ore prices rise 54%

(ii) international
• Iron ore ship rentals fall the most in months due to oversupply of vessels – and are 86% lower than a year ago
• Sundance seeks additional Chinese partner for $4.7 billion African iron ore project
• Severstal agrees to buy access to Brazil’s iron ore licenses
• ArcelorMittal Q1 profit beats estimates; but it sees a seasonal slowdown
• ArcelorMittal South Africa plans to work its own mine
• Quebec plans $83 billion investment in north of province
• Vale posts record quarterly profit - and more than four fold increase - on higher iron ore production and prices
• CSN says profit rises 38% as mining sales offset steel drop
• Vale’s ‘sea monster’ sends shipping returns plummeting

'The Long Run'

2011-03-11T01:30:00.000-08:00

As Wen revs up for his post-National People’s Congress press briefing on Monday, he could do worse than go see California’s inimitable soft rockers ‘The Eagles’ who this week performed in China for the first time. “I used to hurry a lot, I used to worry a lot......... I just couldn’t carry on that way”. He would, of course, have to shell out up to Yuan 1080 ($164) for the privilege. But “we can handle some resistance” and “when it all comes down, we will still come through in the long run”.

The Premier will need such pragmatism, too, as he digests the week’s economic data. For example, today, annualised inflation for February came in at 4.9% which was disappointingly higher than January, despite the fact that food rose by 11% and non-food by only 2.3%. Similarly, producer prices leapt by 7.2%. Okay, commentators say that data for the first two months of the year in China are perennially distorted by the incidence of the Lunar New Year holiday. But Merrill Lynch, for one, thinks March’s CPI could be 5.5% and PBOC Governor Zhou is on record this week, at the NPC, saying that interest rates will be used to contain inflation.

Earlier in the week, China reported a surprise trade deficit of $7.3 billion for February, the largest in seven years; and within this tally exports rose 2.4% while imports climbed 19.4%. Merrill Lynch also says that for every $1 on the price of a barrel of oil, China’s annual trade surplus dips by $1.9 billion. The smart money says that February’s trade deficit will take pressure off the Yuan and calls for its appreciation. It also supports claims that the Government is shifting towards rebalancing the economy; albeit inflation remains the unwelcome guest here. More popular are industrial output (+15% in February) fixed asset investment up 25% in January and February combined, with retail sales (on the same basis) ahead by 16%. Elsewhere, the rate of sales of new cars slowed to 2.6% in February (the least in 16 months) but this was impacted by the Government ending some incentives and, again, by the holidays. What's more, the China Association of Automobile Manufacturers (CAAM) expects 10 to 15% growth this year (after 2010’s +32%); and as Ford said, 10% growth means 18 million new vehicles which is six assembly plants.

In terms of the money markets, there have also been conflicting signals, with the seven day repurchase or repo rate falling 16 basis points in the week to 2.06% and one year interest rate swaps shaping up for their largest weekly drop in two years: down 29 basis points to 3.46%. Elsewhere, Yuan Forwards eased and are now pointing to just a 2% appreciation over 12 months. This seems at odds with the fear/expectation that interest rates will rise. Only the glass-half-full man would bet against it. And, the story of the week here is a Columbia University study which claims that an increasing number of bachelors in China is limiting the Yuan’s appreciation. Apparently, they are saving money so as to better compete in the marriage stakes with a disproportionately low number of Chinese females.

In real estate, the push/pull is also evident with the Land Ministry ordering local government to keep the lid on land prices, what is deemed “unreasonable” demand from speculators (Qi Ji, Vice Minister of Housing and Urban-Rural Developments) and PBOC advisor Li Daokui saying that home prices will follow the current fall in volumes later this year. However, China Vanke, the Nation’s number one developer, says that demand for its homes will withstand Government efforts to cool speculation this year. It is also the first real estate company in China to generate more than Yuan 100 billion ($15 billion) in sales (in 2010) on which it generated net income of Yuan 7.3 billion (+37%).

On Wednesday, the Shanghai Composite cleared 3000 and was at its best level for four months (i.e. 15 November). Since then it has lost 2.2% (albeit still almost 5% up year-to-date) but many other global markets have done worse as events in Libya, in particular, appear to be set for a more protracted duration. Today’s 8.9 magnitude earthquake in Japan, and a possible ocean of tsunamis in the Pacific are not only desperately tragic on a personal level, but they will also compound geopolitical worries.

“Well, we’re scared, but we ain’t shaking. Kinda bent, but we ain’t breaking” - Don Henley and Glenn Frey

Shanghai Composite:
Today: -0.79% to 2,933.80 at close
This week: -0.33%
Since 5 July: +24.1%
Since 8 Nov: -7.1%
YTD: +4.9%

Hang Seng:
Today: -1.55% to 23,249.78 at close
This week: 0.7%
Since 25 May: +22.5%
Since 8 Nov: -6.9%
YTD: +0.9%

Oil futures: $101.80
Gold futures: $1416.30
(new ‘immediate delivery’ high of $1444.95 on 7 March 2011)
Euro/$ spot: 1.3816

INFLATION
• February CPI rises to an annualised 4.9%; but no change on month
• Food costs rose 11% from a year earlier, while non-food prices rose by just 2.3%.
• Producer prices jumped 7.2% last month (most since 09/2008)
• Fixed asset investment grew 25% in the first two months of 2011 from a year earlier
• Retail sales rose by a less-than-forecast 16% in January and February combined
• Industrial output rose 15% in February from a year earlier
• Incidence of Lunar New Year holiday distorts data
• Merrill Lynch forecasts March inflation of 5.5%.
• PBOC Governor Zhou says interest rates will be used to contain inflation, and played down the role of currency gains
• Zhou also said that liquidity will be tighter this year

ECONOMY
• China post unexpected $7.3 billion trade deficit as exports slow (+2.4%) and imports surged (+19.4%)
• Car sales growth rises at slowest pace in more than two years
• Foreign carmakers warn of China slowdown

EQUITIES
• Stocks may rise 21% on valuations, says Daiwa
• Bullish China call options beat the puts and the bears for the first time since 2009
• Li's Hutchison Port seeks to raise $5.4 billion in Singapore IPO

MONEY
• One year interest rate swaps look set for largest weekly drop since November 2008
• Li and Chen opine on the Yuan
• China raises yield on three month bill and swap rates rise
• PBOC holds yield on one year bills
• China faces 60% risk of a bank crisis by 2013, says Fitch
• Yuan-linked bonds reduce costs for Powerlong Real Estate
• Bachelors limit Yuan gains more than China’s policies, says Columbia University

REAL ESTATE
• ‘Great Wall of Money’: Asia-Pacific real estate attracts 45% rise in property investment, says DTZ
• Land Ministry orders local government to keep the lid on land prices
• Property demand is driven, in part, by “unreasonable” speculation, says Housing Minister
• Home prices to fall, says PBOC advisor Daokui
• China Vanke says demand will withstand Government efforts to prevent a bubble

INTERNATIONAL
• China Guangdong Nuclear Power plans $1.2 billion bid for uranium unit Kalahari Minerals
• China’s Vice Premier to visit Kenya, Zimbabwe and Angola this month

DOMESTIC
• China reports a 68% jump in hacking attacks on Government websites in 2010
• Power regulator says China must consider take inflation into account in electricity pricing

IRON & STEEL
• February’s iron ore imports fall 29% on month: 1.5% annual
• February steel output gains 9.7%, year-on-year, as prices fall
• Wuhan, Angang and others turn to niche steel and exports amid domestic difficulties
• Rio raises Riversdale bid by 3% to $3.9 billion
• Essar to spend $750 million to revive Zimbabwe Iron & Steel

Green Monday

2011-03-07T01:20:00.000-08:00

‘Green Monday’ is a first novel by ex-investment banker Michael M Thomas about manipulation of global oil prices and their impact on the stock market. It was first published in 1980 (i.e. there really is nothing new). The title refers to the potential uplift at the beginning of a trading week on the back of weekend news. Premier Wen Jiabao is no doubt familiar with the term and did his best at the weekend’s National People’s Congress (NPC) to deliver one; and today the Shanghai Composite rose nearly 2% which takes it 6.7% to the good in 2011 so far.

The NPC is an annual gathering but more special this time because it unveils the Government’s new five year plan (the modern Nation’s 12th in 61 years). Wen said that his number one priority is to fight inflation and to ease the social unrest which higher prices has exacerbated. He also intends to reverse the widening income gap “as soon as possible” through fiscal measures and stoke domestic consumption. China’s annual economic growth target, as previously promulgated, will be 7% (maybe 8% in reality) with inflation pegged at 4%; and the strap-line being bandied about (and attributed to President Hu Jintao) is “inclusive growth”.

More specifically, fiscal spending will rise 11.9% this year to Yuan 10 trillion, although the budget deficit will be held at 2% of GDP (2010 = 2.5%). Similarly, cash for housing will rise 9.6% to Yuan 258 billion (although this disguises a 35% increase for low income housing). Hand in hand, too, will come an “adjust and improve” on real estate tax policies to control “exorbitant” house prices.

Turning to currency, the NPC also opined that the Yuan could happily rise 3 to 5% per annum. The PBOC’s Deputy Governor also said the currency was as close to equilibrium as it had ever been. The money market agreed, too, as the seven day repurchase or 'repo' rate galvanised its three month low (at 2.18%).

CICC says that the average gain for the stock market in the four weeks following the NPC (since 2006) is 13%; and 2011 will be similar. It likes the Government for what it calls “maintaining stability”. Similarly, Robeco speaks of a “window of opportunity”. I was also encouraged by the stoicism of China Overseas Land & Investment. It is the Hong Kong listed developer controlled by the Nation’s Ministry of Construction. It plans to set up a real estate fund of $300 to 500 million to invest in commercial and residential property in China where it believes that the demand will prove resilient to Government measures to control it.

Okay, a lot has to go right from here and inflation and inequality are not beaten yet. Nonetheless, investors have their pocket books out once again.

“Monday is the key day of the week” - Gaelic proverb

Shanghai Composite:
Today: +1.83% to 2,996.21 at close
Last week: +1.3%
Since 5 July: +26.8%
Since 8 Nov: -5.2%
YTD: +6.7%

Hang Seng:
Today: -0.41% to 23,313.19 at close
Last week: +1.7%
Since 25 May: +22.8%
Since 8 Nov: -6.6%
YTD: +1.2%

Oil futures: $106.00
Gold futures: $1438.20
(new ‘immediate delivery’ high of $1441.00 on 2 March 2011)
Euro/$ spot: 1.3997

NATIONAL PEOPLE’S CONGRESS
• Wen targets inflation as priority so as to ease social unrest
• Inflation is putting China’s “dream” at risk, says Wen
• +3 to 5% for the Yuan per annum
• Fiscal spending rose 11.9% this year to Yuan 10 trillion
• Housing spend to rise 9.6% to Yuan 258 billion
• China’s spending on internal police force in 2010 was larger than on national defence; and plans to do the same this year
• The 2011 Budget at a glance

EQUITIES
• Shares rise to three month high on economic plan
• Economic plan opens “a window of opportunity” for a stock market rebound, says Robeco

MONEY
• Money market rate declines and sustains three month low
• The Yuan is as close to equilibrium as it has ever been, says PBOC’s Yi

REAL ESTATE
• Property tax will be more effective if applied national, says Mayor of Chongquing
• China Overseas Land plans a $500 million real estate fund, as it bets the Government will not overly constrain property demand

DOMESTIC
• Drought impact on crops is “limited” says Government

INTERNATIONAL
• Relations between China and the US enjoy a “good atmosphere”

HONG KONG
• Hong Kong’s inclusion in China’s five year plan underlines its importance to the PRC
• HK house prices rise 0.9% in last week of February

IRON & STEEL
• Wuhan Steel aims to by more international iron ore resources in push to self-sufficiency; as foreign suppliers plan a dock side spot-selling unit
• Guinea plans a review of all its mining licenses
• Baoshan wins drill pipe anti dumping case in US

Medicine: domestic and international

2011-03-04T00:11:00.000-08:00

We have all heard of cases when the medicine was so strong that it killed the patient. In China, though, there is a healthy chance that the administered dose was the correct one. Herein, the first symptom is February’s bank lending which is reported, by the China Securities Journal, to be less than Yuan 600 billion (or $91 billion). We will have to wait until around 11 March to know the official number, but the smart doctor knows that it is most likely true; and that it compares with Yuan 1.04 billion in January and Yuan 700 billion a year ago. Secondly, the seven day repurchase or ‘repo’ rate has fallen to its lowest level (2.22%) since 7 December.

Numbers three, four and five are a hat trick of Purchasing Manager’s Indices (PMIs) which showed that manufacturing expanded at its slowest pace in six and seven months in February (Logistics Federation and HSBC/Markit respectively); and the same for Non-manufacturing (National Bureau of Statistics/LF). Okay, the holidays impacted the later (but it would have still been lower) and input prices remain a concern; but at the same time, a measure of business prospects inched up.

Then, under the heading of rehabilitation it is also rumoured that the Government will reduce tax rates for individuals and ease the tax burden for low income earners. This comes ahead of the National People’s Congress which kicks off tomorrow and which will showcase the Nation’s new five year plan. Lower tax would of course assist the growth of domestic consumption which is a stated policy objective. On this tack, it is also interesting to note that China’s richest man, Zong Qinghou (worth $12 billion says Hurun), who is also Chairman of soft drink maker Wahaha, is planning to open 100 department stores.

Turning, to real estate it is wise to seek a second opinion. On the one hand, new home sales in Shanghai (-83%) and Beijing (-70%) in February were truly awful. This was most likely driven by Government policy but could also be something of a knee-jerk reaction. More sanguine is the fact that SouFun said, nationally, prices in February (+0.5%) rose at their slowest pace in six months. More broadly, Soho China, Beijing’s largest CBD developer, while ultra cautious on housing, expects a “significant increase” in commercial property prices this year. Plus, in the fit and healthy camp, China Vanke said that its sales in February rose 142% by value (Yuan 6.1 billion) and 160% by volume (to 549,000 square metres).

Construction (China is now the global leader in scale), cement (new investors/investment) and railroad building are in peak condition too, although there are some concerns on the latter’s funding. Plus, there has even been some soothing rain in drought affect areas.

Turning to the international medical profession, it is worth pointing out the Shanghai Composite has risen 10% since the first shoe was thrown in Egypt on 25 January. This is also despite an incipient Jasmine consciousness in China and, although the police have been strong arming any flag wavers, Wen has taken notice of what has been said and has hinted at policy change. Dr China has also increased its holdings of US Treasuries to over $1 trillion and comfortably retains its number one spot on the US creditors list. Being America’s banker (as former Aussie PM Kevin Rudd said) has a lot of health benefits.

And the final word goes to Michael Holland (who may or not be a doctor) Chairman of boutique investor Holland & Company: “the market had been very, very adverse to accepting the good news out of China, always looking for the last several quarters at what could go wrong. In the case of China, it’s only a matter of time, along with Taiwan, before investors come back to realise that this thing has been working and will continue to work”.

Shanghai Composite:
Today: +1.35% to 2,942.31 at close
This week: +1.3%
February: +4.1%
Since 5 July: +24.5%
Since 8 Nov: -6.7%
YTD: +4.8%

Hang Seng:
Today: +1.24% to 23,408.86 at close
This week: +1.7%
February: -0.5%
Since 25 May: +23.3%
Since 8 Nov: -6.2%
YTD: +1.6%

Oil futures: $102.75
Gold futures: $1416.90
(new ‘immediate delivery’ high of $1441.00 in March 2011)
Euro/$ spot: 1.3956

EQUITIES
• China’s ETF assets to out perform ROW, says BlackRock
• China's stock exchanges plan to double ETFs

ECONOMY
• Manufacturing PMIs fall (to 52.2 and 51.7) as monetary policy begins to take effect
• Non-Manufacturing PMI falls sharply (to 44.1) in February on seasonal factors
• Personal tax thresholds and rates to fall
• China's richest man plans to expand into department stores
• China’s energy use to rise 4.24% per annum through 2015 when it will cap energy use at the equivalent of 4 billion tons of coal

MONEY
• February’s new loans decline to less than Yuan 600 billion, claims China Securities Journal
• Money market rate falls to lowest (2.22%) this year
• CBRC’s Liu sees only gains for the Yuan
• Yuan may strengthen faster on liberalisation, says Societe Generale
• NDRC is to ease limits on outward bound investment
• China’s holdings of US Treasuries rises to $1.16 trillion

REAL ESTATE
• Shanghai’s new home sales in February fall 83%, says Uwin
• Beijing new home sales in February fall 70%, says Xinhua
• Shanghai house price also fell 10%, says Uwin
• National house price growth was the slowest in six months in February, says SouFun
• Shanghai makes it is easier to qualify for low cost housing
• China Vanke says that February’s sales rose 142% to Yuan 6.1 billion, year-on-year
• Soho China reports 2010 net profit up 10% and expects commercial real estate prices to rise

CONSTRUCTION
• China builds way to top of global construction league

CEMENT
• Taiwan’s Far Eastern Group plans to buy more cement companies in the People's Republic of China
• West China Cement plans a Yuan 3 billion investment

RAIL
• Railroad yield gap is at a six month high as debt sales increase

DOMESTIC
• Wen welcomes billionaire members to the National People’s Congress - as the wealth gap widens
• China’s drought affected regions have had rain
• China’s defense budget to rise 12.7% to $91 billion this year

HONG KONG
• Hong Kong to give individuals $6,000
• Hong Kong says February home sales rose 37% versus January; and 10% year-on-year

IRON & STEEL
• Australia economics bureau, ABARES, is bullish on iron ore; but says prices will fall as supply rise
• Australia's iron ore exports to rise 5.5% in 2011, says ABARES
• Iron ore shipping rate end 10 day decrease
• Indian iron ore exports fall for seventh month in a row
• ENRC to spend $6.8 billion on iron ore in Kazakhstan and Brazil
• Fortescue in new billion ton iron ore discovery after its H2 2010 prices more than doubled to $138.50
• China International Fund to invest $100 million in Bellzone’s Guinea iron ore project; as Bellzone’s losses increase
• Rio Tinto and Baoshan sign three year coal deal

“A scent of jasmine and a rasp of sand”

2011-02-28T00:26:00.000-08:00

These are the words of writer James Morris and I think we all know what he means, as Oman now joins the Middle East and North African democracy bun-fight. As I noted on Friday, too, China has not been spared the so-called “Jasmine Revolution” either, although the scale of anti-Government demonstrations is impossible to determine or estimate.

What is clear, though, is that the rallying cry via the Internet has been vociferous and persistent (despite LinkedIn being down for 24 hours Friday through Saturday). The police presence has also been the same and, on Sunday in Shanghai, at least 23 police vehicles were stationed around Shanghai’s Peace Cinema in the shopping area of People’s Square. Similarly, the police in Beijing co-opted paramilitary units with Rottweilers and German Shepherds. Several foreign journalists were also removed from the streets and/or asked, by telephone, to “obey reporting rules”.

An open letter from a US sourced website named Boxun.com called on people to gather in at least 27 sites around the country for Jasmine rallies. “Come out and take a stroll at two o’clock on Sundays to look around”. It also called for the Communist Party to fight corruption, create an independent judiciary and reduce income inequality; or else “exit the stage of history”. The letter added, too, that economic growth in both Taiwan and South Korea had been achieved with a much more equitable spread of income levels.

By way of defence, Premier Wen Jiabao used the internet himself for an online two hour interview with Chinese citizens on the site of the official Xinhua News Agency. Herein, he promised much, including control of inflation and punishment of any abuse of power by the Government and/or officials. Wen also pledged to boost agricultural production and punish hoarding and price manipulation; plus he claimed that the Country has sufficient grain and foreign currency reserves to control food prices. “Growing inequality is a threat to social stability”.

More broadly, and by way of a sneak preview of the National People’s Congress (from 5 March), Wen said that the Nation has set a lower growth target for the period from 2011 through 2015 - in order to foster a more sustainable economy. This means that the Government has set annual economic growth at 7.0% for its 12th five year plan. Previously, China’s target was 7.5% for the period from 2006 to 2010, with actual growth exceeding that each year. “We want to put the emphasis of our work on the quality and the benefits of economic growth. We want the fruits of development to benefit the people”. China cannot “blindly” pursue economic growth that is unsustainable, he added. Generally, too, these comments were welcomed by commentators.

Wen also spoke about property and house prices, with an emphasis on controlling speculators and prices; and using legal and economic measures against those who hoard land. Best of all, though, Wen said China will build 36 million affordable houses over the next five years. Little wonder, then, that the share prices of cement manufacturers rose. The Yuan also rose close to a 17 year high as the Chinese Premier (leaving no stone unturned) said a stronger currency will benefit the Nation’s economy.

In fact, the whole market had a not-too-bad-a-day (+0.9%) this Monday either, but the really good news is that February (+4.1%) showed the first month-on-month rise in the Shanghai Composite since October. This also means that in the year-to-date, the Index has risen by 3.5%.

“The word February is believed to have derived from the name ‘Februa’ taken from the Roman Festival of Purification” - Mystical WWW

Shanghai Composite:
Today: +0.92% to 2,905.05 at close
Last week: -0.7%
February: +4.1%
Since 5 July: +22.9%
Since 8 Nov: -8.1%
YTD: +3.5%

Hang Seng:
Today: +1.42% to 23,338.02 at close
Last week: -2.5%
February: -0.5%
Since 25 May: +22.9%
Since 8 Nov: -6.5%
YTD: +1.3%

Oil futures: $99.31
Gold futures: $1412.40
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3784

JASMINE
• Wen promises to control inflation as the ‘Jasmine Revolution’ percolates; and he will also punish the ‘abuse of power’ by Government and/or officials
• Economic growth target reduced to 7% amid calls for sustainability
• Wen opines on property too
• Wen pledges to combat graft and improve income inequality, as police seek to neutralise protests

MONEY
• Repo rate falls to lowest level in a week as interest rate swaps touch to a two week low - as PBOC injects $39 billion into the system
• Yuan rises back towards its 17 year peak after Premier Wen says a strong currency is beneficial; as Forwards point to a further +2.4%
• China's return on FX investments dip

EQUITIES, DOMESTIC & INTERNATIONAL
• Shares in February show their first monthly rise (+4.1%) since October; as Wen announces plans to build 36 million affordable homes over the next five years
• Lowly rated bank shares are barometer for economy
• China’s 2010 energy consumption rises 5.9%; but falls 4.01% per unit of GDP
• Chinese banks will increase lending to Greek shipping industry

IRON & STEEL
• Record iron ore prices loom, says FT; and China sets new record for imports in January (69 million tons)
• Rio and BHP may raise Q2 iron ore prices by at least 23%

Not noon (yet)

2011-02-25T02:52:00.000-08:00

“Good news always sleep ‘till noon”, says the peerless Michael Timmins and if you live in Tripoli or Christchurch that is certainly true (and then some). Respectively, what is happening in Libya and environs is quite extraordinary: people power and history in the making, fuelled by cyber-space. The World will never be the same again and tyrants everywhere beware! Meantime, in New Zealand (the Nation of my birth), there has been more literal seismic activity with a 6.2 tremblor on Tuesday, which reportedly lasted a rare, but interminable, 60 seconds. The devastation is as extraordinary as the events in the Middle East and North Africa and the loss of life (113 and counting) similarly astonishing for a country with a population of only 4.5 million. Like the World, NZ may never be the same again but there is an indefatigability of spirit amongst Kiwis articulated by the dictum “she’ll be right”; which is much more profound than it may first appear.

Unsurprisingly, too, there has been a dearth of news outside the Mediterranean and Southern Pacific, with China being no exception; and my blogging fingers have been veritably twitching. For the record, though, the Shanghai Composite - after a bright start on Monday - then fell each day until today which means the first weekly deficit (-0.7%) since w/e 21 January. It could have been worse, though, and in Hong Kong it was - with a 2.5% fall in the week (despite a sterling effort on Friday).

That said, those nice (and very bright) people at CICC noted that the Shanghai Composite is up 2.5% in the year-to-date. They also say that stocks may extend these gains as money supply growth approaches a level which will force the Government to ease its “tightening campaign”. M1 growth, which averaged 17% for the past 16 years, has rebounded each time it neared 10% - such as in 1998, 2002, 2005 and 2008, says CICC. The rate slowed to 13.6% last month, compared with a 15 year high of 39% in January 2010. “Whenever M1 growth approached 10%, money supply growth started to rebound, and together with it the A and H shares in Shanghai and Hong Kong”. This week, too, both the seven day repurchase rate (down 29 basis points to 3.11%) and interest rate swaps eased as international turmoil sped up.

Elsewhere, both CICC (again) and Shenyin Wanguo Securities said that February’s inflation rate could ease back 0.1% to 4.8%. This may not sound that great, but previously CICC was forecasting 5.6%.

More broadly, the Nation is to spend $228 billion on airports and aviation infrastructure through 2015, says the Civil Aviation Administration of China; which is a lot of money, even for China.

In real estate, the Government has underlined its commitment, this week, to build a mass of new social housing and to expand the public rentals sector. It will also provide tax cuts and finance to help. Some commentators took this as bearish news for developers, and their sub-Index within the Shanghai Composite is down 3.2% since 21 February (at 3397.12). However, China Vanke, the Nation’s number one, says it is confident that its sales will stay above Yuan 100 billion ($15.2 billion) for a second year. It breached this remarkable level last year having set itself 2014 as the target year to do so. But there was also a barb in the tail, when it added that “it will also depend on Government policies”.

Similarly in Hong Kong, as part of this week’s budget, the Government has said that it will increase auctions of land and build more apartments to avert a real estate bubble. Elsewhere, house prices in Macau and Taiwan continue to race ahead by 15 to 20%, although Taiwan is now seeking to curb investor speculation by taxing them 15% if they sell a unit within a year of purchase.

Even more fundamental, the putative “Jasmine Revolution” continues to ripple through a minority of folks in China, with a web-based call for anti-Government rallies every Sunday at 14.00 in 13 major conurbations. “Jasmine Z” and his or her “Jasmine Voice” cyber discussion group has also emerged this week, although the platform - LinkedIn - has now been blocked. No coincidence then that, this week, too, President Hu made a speech extolling the virtues of socialism with Chinese characteristics. His new five year plan will also be promulgated in a few days from now after the National Peoples’ Congress which starts on 5 March. No pressure.

“Never get out of bed before noon” - Charles Bukowski

Shanghai Composite:
Today: -0.04% to 2,878.57 at close
This week: -0.7%
Since 5 July: +21.8%
Since 8 Nov: -7.2%
YTD: +2.5%

Hang Seng:
Today: +1.82% to 23,012.32 at close
This week: -2.5%
Since 25 May: +21.2%
Since 8 Nov: -7.8%
YTD: -0.1%

Oil futures: $97.97
Gold futures: $1404.80
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3791

EQUITIES
• Weekly equity decline is first in more than a month; although CICC is positive
• Minsheng Bank to seek $4.6 billion from a share and bond sale, it is reported

MONEY
• Repo rate and swaps ease on international political instability; bond yields rise
• February’s inflation may ease 0.1% to 4.8%, say CICC and Shenyin
• Ministry of Finance 30 year bonds at 4.31%
• CBRC asks banks which have lent to local governments to recalculate their capital levels by 31 March

ECONOMY
• Chinese consumer confidence slides on inflation
• China may invest $228 billion in aviation through 2015
• Volvo/Geely is reported to have selected Chengdu as the site for it first Chinese factory
• Rolls-Royce aims to boost car sales at least 10% in 2011 on the back of Chinese demand

REAL ESTATE
• Government will financially assist new social house-building and public sector rentals
• China Vanke is “confident” that its sales will stay above Yuan 100 billion for a second year
• Five Beijing banks end mortgage discounts

DOMESTIC
• China’s ‘Jasmine’ rally organiser calls for weekly gatherings via the web
• LinkedIn is blocked in China after “Jasmine” pro-democracy postings and commentary
• PBOC to make Yuan 10 Billion loans to aid drought regions
• China’s progress shows “superiority” of system, says Politburo

INTERNATIONAL
• Kazakhstan embraces Chinese investment
• China’s investment in Africa is to increase to $50 billion by 2015, says Standard Bank

HONG KONG, MACAU & TAIWAN
• Tsang says Hong Kong's main task is “fighting inflation”
• Hong Kong to boost land auctions and build apartments to avert a bubble, says Tsang
• Macau home prices may gain up to 20% in 2011 on growth in the casino trade (which dwarfs las Vegas)
• Taiwan may impose 15% tax on investors who re-sell houses within a year

IRON & STEEL
• Iron ore prices in China fall as buyers utilise stock piles, says Deutsche Bank
• China plans to increase iron ore investments abroad to where they meet 40% of imports in five years, says CISA
• CISA says China should better mange it iron ore stocks and steel manufacturing capacity; as finished product prices dip
• Demand to ship iron ore will rise 6% in 2011, says Clarkson
• Vale’s Q4 net profit rose almost four-fold on iron ore prices: volumes rose 17%, while prices averaged $121 per ton, which is an increase of 216%
• Vale plans to out spend rivals this year with a $24 billion budget
• Vale to spend more than $1 billion building Guinea railroad to access iron ore
• Taiwan’s China Steel sees Q4 net income collapse 71% on increased raw material cost; and now raises prices for second time this year
• Afripalm signs a deal to build a South African steel mill

Rate of reserve

2011-02-21T00:46:00.000-08:00

Alliteration, acronyms and after-hours are all favourites of the Chinese authorities and so it was late on Friday that the PBOC raised RRRs again. For the uninitiated, Reserve Ratio Requirements control how much cash banks have to have on hand in proportion to what they lend i.e. it is a way of restraining liquidity and, thereby, reducing inflation. In any event for the largest banks in China, this ratio will rise from 19.0 to 19.5% from 24 February, although there may be some additional, individual requirements here and there. Many commentators believe that this is a more effective damper than raising interest rates and China has used it eight times (including this latest one) since the start of last year. But note, too, it has also hiked interest rate three times since October in a belt-and-braces policy.

The timing of the move was doubly interesting, too, in that it came hours before G20 finance ministers and central bankers convened for their regular knees-up, this time, in Paris. This was intended to show that the Chinese Government is serious about fighting inflation, an intention galvanised by the added statement that the Nation will extend its four month old cycle of interest rate increases. The latter, in particular, was also designed to try and defuse criticism of the Yuan’s supposed under-valuation; and for good measure it is at a 17 year high today of 6.5676 (and Standard Chartered is plumping for 6.2 by the end of the year).

Despite this, there was still veiled (Bernanke) and unveiled (Geithner) criticism of the Yuan at the G20. Nonetheless, China contributed whole-heartedly to the proposed formulation of an early warning system to detect economic fissures. This is designed to smooth lopsided trade and investment flows and avoid a re-run of the GFC. The scorecard will be enforced through peer pressure rather than hard targets and comprise budget deficits, external imbalances and private saving rates. If will not, however, include currency reserves which was kiboshed, principally by the World's number one holder of such things, China (with support from fellow BRICs, Brazil, Russia and India). China also objected to the use of the current account, the widest measures of trade, as a benchmark. It said that this would give the West an opening to force up the Yuan. And so, in what Geithner called “deft diplomacy”, the statement was euphemised to include the current account’s components - trade and investment income - and labelling them the “external imbalance”.

Domestically, too, China is taking this G20-type initiative further with its bank regulator reported to be planning to instruct all lenders (especially the systemically important) to set up procedures to restore their finances in the event of a crisis; a step which some commentators have labelled “self-rescue”.

Nor is life quiet in real estate where Shanghai and Guangzhou will now ban residents who own two or more homes from buying more property and non-local homeowners from making additional purchasers. Nanjing and Harbin are apparently doing the same. Nonetheless, the sub-Index of developers within the Shanghai Composite firmed 0.6% to 3,509.88. just as the Composite itself did (+1.1%) to where it is now 4.4% ahead in 2011 to date.

Finally, in the truly unsavoury department is China’s blocking of phone messages and websites showing the pro-democracy demonstrations taking place in the Middle East. Despite this, too, there has already been putative copy-cat action known as the ‘Jasmine Revolution’ and more than 20 cities have stepped up security, especially in an around universities. In a nation of 1.3 billion people, though, the scale of protects has been tiny, unlike the Middle East. It is a reminder, however, of how China works and the social challenges - in particular - for current Vice President Xi Jinging who assumes the top job next year.

“The time to stop a revolution is at the beginning, not the end” - Adlai Stevenson

Shanghai Composite:
Today: +1.12% to 2,932.25 at close
Last week: +2.6%
Since 5 July: +24.0%
Since 8 Nov: -7.2%
YTD: +3.3%

Hang Seng:
Today: -0.47% to 23,485.43 at close
Last week: +3.4%
Since 25 May: +23.7%
Since 8 Nov: -5.9%
YTD: +2.0%

Oil futures $87.87
Gold futures: $1398.50
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3693

MONEY
• Yuan rises to 17 year high as PBOC signals room for gains
• PBOC to raise bank reserve ratios again by 0.5% to a minimum 19.5% for the large banks from 24 February
• China may require its banks to plan for the risk of a financial crisis

ECONOMY
• China increases retail fuel prices after crude oil prices rise

EQUITIES
• HSBC recommends avoiding China shares until H2 2011

REAL ESTATE
• Shanghai and Guangzhou limit home purchases
• China eases limits on trust loans to developers, says Caijing

DOMESTIC
• China blocks coverage of protests in the Middle East

INTERNATIONAL
• China’s Hasan plans to invest $4 billion in Ghana
• China gives $8 million to Togo

G20
• G20 agrees to set imbalance yardsticks and an early warning system, despite China opposition
• Bernanke reiterates US criticism of China’s Yuan policy – in theory but not by name
• Russian Finance Minister says that China is failing to drive global growth, as it should

68-out-of-70 looks like a great score

2011-02-18T02:02:00.000-08:00

Pity the poor residents of Quanzhou and Nanchong in south east and west China, respectively, where new home prices failed to rise in January; and they were the only two cities out of 70 monitored by the Government. Pick of the bunch, was Haikou with a 21.6% gain, while 10 other cities were at 10% or more. In Beijing the rise was a more sedate 6.8% while Shanghai struggled by on +1.5%. These numbers are also the first from the Government’s new method of calculation. Volume gains, however, were more modest with Beijing and Shanghai on 0.8% and 0.9% respectively, although only one city was negative: Chongqing (-0.1%).

Views are divergent about what this means, with the likes of Standard Chartered saying that the Government needs to tighten liquidity and raise interest rates. Others such as Credit Suisse and Mizuho said that there may have been a surge in demand ahead of further Government constraints being introduced. These includes new measures in Beijing which has banned residents from owning more than two houses; and non-locals will only be able to buy one - and, then, only after producing five years of tax documentation.

Meantime, BNP Paribas added that “although property is being targeted with tightening measures, overall credit growth in the economy remains expansionary. The memories of the 2008 downturn in exports and housing prices are still too fresh at central and local government level to create another downturn”.

Similarly, Fitch Ratings said “demand will be restrained in the beginning of the year after the Government measures” and it has a “neutral” view on the sector. Nonetheless, it also said that China’s home prices will rise about 5 to 10 % this year because property remains a hedge against inflation.

The stock market couldn’t make its mind up either and the sub-Index of property developers within the Shanghai Composite rose and fell before settling 0.2% lower at 3318.04, albeit this is still 5.1% up in the year to date (after an awful 2010).

However, Ronnie Chan, Chairman of Hang Lung Properties (which means “eternal prosperity”) is betting $5.1 million on Chinese consumers. He plans to build some 1.5 million square feet of malls and offices in five Chinese cities outside Shanghai over the next five years. And, this will follow the opening of a fourth mall in Jinan in August (after which the Company’s rent roll in China will be greater than in Hong Kong: HK 2.61 billion in the year to June 2010).

More broadly, Macquarie says that China, over the next five years, will spends some Yuan 3.5 trillion on railway construction plus the same amount on highways; and a few billion here and there on airports and docks. And this follows rampant spending on the same over the last two years in a progamme, which RBC says was the same size as the entire Swiss economy. This will also serve to open up regional China in unprecedented fashion and bring with it gargantuan development opportunities.

In the more general, contemporary economy, however, it was disappointing that The Conference Board’s leading economic index for China fell in December for the first time since 2008 – by 0.5% to 154.3 from November. It did say that it was “too early to tell” if the World’s second largest economy will have an economic slowdown; although it added construction and consumer sectors were weakening, as growth in the industrial sector remains strong. I would also add that this index is often subject to revision.

Another double edged note was sounded with FDI, which rose 23.4% in January to $10 billion, with investment in the service sector and western China particularly strong. Yes, this is good news, of course, although it may also stoke liquidity and inflation – which could lead to further tightening; and to further calls for the Yuan to rise. The latter has already been raised at today's (and tomorrow’s) G20 policy makers meeting in Paris.

Finally, the Shanghai Composite dipped (0.9%) for the first time in seven sessions albeit that it is ahead 3.3% in the year to date. Neither figure is particularly exciting and ‘torpor’ is a word that springs to mind. In turn, this puts more pressure on next month’s National People’s Congress and where there are expected to judicious commentaries, encouragement and a raft of new pro-growth policies. All are needed.

“Whatsoever, after due examination and analysis, you find to be kind, conducive to the good, the benefit, the welfare of all beings that doctrine believe and cling to, and take it as your guide” - Hindu Prince Gautama Siddharta

Shanghai Composite:
Today: -0.93% to 2,899.79 at close
This week: +2.6%
Since 5 July: +22.7%
Since 8 Nov: -8.2%
January: -0.6%
YTD: +3.3%

Hang Seng:
Today: +1.26% to 23,955.34 at close
This week: +3.4%
Since 25 May: +24.3%
Since 8 Nov: -5.5%
January: +1.8%
YTD: +2.4%

Oil futures: $86.14
Gold futures: $1387.10
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3573

ECONOMY
• China leading index falls for first time since 2008
• FDI rises 23.4% in January
• Inflation in wider economy is up faster than the CPI, says Nomura
• Inflation is likely to remain “relatively high” in Q1 before easing in Q4, says Statistics Bureau
• Inflation may rise to 5.2% in February, says State Info Center
• China's car sales growth slows to 16% after tax incentives end
• Vehicle exports rise 40% (but imports of same double)

MONEY
• Money market rates are set for weekly gain
• China’s regulator tells banks to reduce the use of external ratings
• “Hot money” inflows were at $35.5 billion last year, says SAFE; which Credit Agricole says “is not a major problem” – nor will it restrain PBOC rate hikes
• PBOC pumps Yuan 55 billion into the system this week; less than the previous one
• PBOC sells Yuan 10 billion of 3 month bills at unchanged 2.6243%
• Ministry of Finance sells Yuan 30 billion 5 year bonds at 3.60%
• China may loosen deposit rate controls, says Deutsche and Mizuho
• Capital ratios to rise again?

REAL ESTATE
• Home prices rise in 68 out of 70 cities
• Government releases new housing price index
• Beijing City limits home purchases
• CBRC warns on property loans
• Property bonds tank
• Hang Lung Properties makes $5 billion bet in China

TRANPORT LINK EXPANSION
• China plans to spent “trillions” of Yuan on rail and transport links over the next five years; which will open up inland regions and cities

DOMESTIC
• Wheat price rebounds as China's drought may restrict domestic output and lead to imports

INTERNATIONAL
• G20 tensions continue on the Yuan
• EU imposes duties as high as 62.9% on Chinese glass fibres
• Ghana expects to commence building a $6 billion rail network in April, with Chinese contractors and Chinese cash
• Ghana will also receive $167 Million from China for the Bui hydroelectric project

HONG KONG
• Hong Kong retail sales rose 18.5% in December as unemployment fell and visitor levels increased (including a 26% rise for visitors from mainland Chinese)

IRON & STEEL
• Iron ore imports to China may dip by up to 3% in 2011 (for the second year running), says Mysteel and Ministry of Industry; as domestic production rises
• Steel prices rise again for Wuhan and Baoshan
• Capesize bookings for deliveries to China increased 20% last month, says Clarkson
• Wuhan Steel and Canada’s Century Iron Mines agree to develop mining projects; which comes two days after Wuhan’s deal with Adriana to develop Lac Otelnuk
• BHP Billiton may spend $25 billion on iron ore, says Citigroup
• Novolipetsk and Metalloinvest sign a four year iron ore supply contract; and local bank forecasts 38% increase in prices this year
• Cliffs Natural Resources best analysts' estimates as net profits triple and margins double to 28.7%

Leaks and liberties

2011-02-15T00:57:00.000-08:00

Most markets, financial or commodity, don’t like surprises. Additionally, as my fifth grade maths teacher told me: “if you don’t like the answer, change the question”. In practice, Chinese policy makers appear to be adhering to both tenets, as evidenced by the handling of the latest inflation data.

Indeed, not for the first time in recent months, figures have been ‘leaked’ ahead of official promulgation. For example, up until early yesterday the median estimate of 27 economists in a Bloomberg survey was for a CPI of 5.4%. But then Central China Securities came out and said it would be 4.9%. The Shanghai Composite rose 2.5%. And, today, what-do-you-know, inflation in January was 4.9% and equities closed unchanged.

Part 2 of this delivery, though, came in the form of jiggery pokery in the data calculation. China cut the weighting of food in the consumer price index by 2.21%, although it failed give the new weighting (it is thought that food previously accounted for a third of the basket of goods which made up the index). BGC called it a “fudging of the numbers”, although others, including Citigroup, were more generous. Similarly, Nomura has turned bullish on China’s stocks for the first time since November – calling them “inexpensive”. It also said that valuations and money supply growth favour equities even as interest rates increase. “Growth in money supply is still supportive for asset prices even with three increases in borrowing costs since mid-October”.

No, inflation hasn’t gone away either for consumers or producers - and the latter's prices rose from 5.9 to 6.6% in January; and the Statistics Bureau tinkered with the calculation here as well, thereby reducing it by 0.05%.

However, the Government may be simply buying time with the hope/expectation that inflation will moderate as the year proceeds. Note, too, that although new bank lending in January was Yuan 1.2 trillion ($182 billion) - and up from Yuan 481 billion in December - it was less than January last year when it was Yuan 1.4 trillion.

Similarly, China’s benchmark money market rate fell to the lowest level in a month on speculation the PBOC may pursue less aggressive monetary tightening. The seven day repurchase or ‘repo’ rate fell eight basis points to 2.64%, which is the lowest level since 2.58% on 17 January.

The more general economy also appears alive and well with passenger car sales in January up 15.3% from a year and imports of iron ore surging 48% in the same month as output in construction and the automobile industries rose.

“There’s a wind in my sails which will protect and prevail” – from 'Six Months in a Leaky Boat' by Split Enz

Shanghai Composite:
Today: +0.00% to 2,899.24 at close
This week: +2.5%
Since 5 July: +22.6%
Since 8 Nov: -8.2%
January: -0.6%
YTD: +3.3%

Hang Seng:
Today: -0.96% to 22,899.78 at close
This week: +0.3%
Since 25 May: +20.6%
Since 8 Nov: -8.3%
January: +1.8%
YTD: -0.6%

Oil futures: $85.16
Gold futures: $1366.30
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3512

ECONOMY
• Shares rise on lower than - initially - expected CPI at 4.9%
• Food prices rise 10.3% (as it’s weighted it reduced)
• Car sales rise 15.3% in January

MONEY
• January lending, as leaked, jumps to Yuan 1.2 trillion: up sharply on December but lower than January last year
• Money market rate dips
• Bill yields rise
• First official hedge fund in China
• China Construction Bank plans to expand its stockbroking research team by 40%

REAL ESTATE
• Second home mortgage rates may rise
• Developer raises finance at 4.75%

DOMESTIC
• Wheat prices surge to a record level on drought in China

INTERNATIONAL
• North Korea’s Kim Jong Il calls for closer ties with China, says Xinhua News Agency

IRON & STEEL
• Iron imports to China rise 48% in January
• Global trade gathers momentum as ships at anchor fall; including an out-performance in China

The St Valentine's Day Rejuvenation

2011-02-14T02:44:00.000-08:00

China’s mail bag, today, was overflowing with gifts – as affection for the Nation rebounded. Japan was first in line as it admitted, officially (what we had all known for some time), that China is the World’s number two economy: $5.88 trillion of GDP in 2010 against Japan’s $5.47 trillion.

Second was a present from multiple givers, as China reported a smaller than forecast trade surplus of $6.5 billion in January as import growth (+51%) outpaced export gains (+38%) for a fourth month. Okay, its relevance is coloured by the timing of the Chinese New Year, but it nonetheless supports the ‘consumption-in China-becoming-a dominant-force’ theory.

Thirdly, Fidelity’s star investor, Anthony Bolton, underlined a continuing conviction about the case for investing in China (where he has been living for almost a year). It is not just any emerging market, he said in the FT, but the dominant economy in Asia and one of the two most important in the World. Yes, there are concerns but all emerging markets, China included, will have to get used to structurally higher inflation. But rising prices are currently being driven by food inflation, which accounts for around 70% of the increase in China’s consumer price index. “It is important to realise that Chinese consumers are not affected by rising interest rates in the same way as they are in the west. Consumer borrowing is very underdeveloped in China, although it is growing. With high levels of cash savings, Chinese consumers might even benefit from rising rates”. Finally, “for a stock-picker such as me, China is a treasure trove of investment opportunity”.

Fourth, is the expectation that January’s CPI (out tomorrow) will be less than expected i.e. Central China Securities says consumer prices may have climbed by 4.9% in January, compared with a consensus estimate of 5.4% (which would be a 30 year high). In advance of this, too, the Shanghai Composite jumped 2.5% to its best level since 21 December. Similarly, the property developer sub-Index within the Composite also rose 2% today. What's more this comes after a note of caution from the Nation's number one real estate operator, China Vanke, and its forecast of a "sharp" fall in sales in February. However, Vanke and its competitors also said that it/they are spreading their wings away from Shanghai and Beijing to smaller regional cities. For example, Evergrande, based in Guangzhou (which sells the second most properties after Vanke) generated more than 90% of its sales in central and western cities including Changsha, Chongqing, Chengdu and Wuhan - the new transportation hub for China’s high speed trains. In addition, land sales in Wuhan rose 163% last year to Yuan 78.2 billion.

By way of background noise, some relief from the drought has come from fresh snow falls and the World’s rice crop appears to be recovering. Elsewhere, PetroChina is intending to spend $5.4 billion on a gas project in Canada, which takes total energy acquisitions this year by Chinese companies to $46 billion. National largesse also continues in Zimbabwe and Guinea. Closer to home, the Government intends to spend an extra $4.6 billion on rural roads and cement consumption is forecast to rise 12% by the China Cement Association.

Happy Valentine’s

“Grow old with me, the best is yet to be” - Robert Browning

Shanghai Composite:
Today: +2.54% to 2,899.13 at close
Last week: +1.0%
Since 5 July: +22.6%
Since 8 Nov: -8.2%
January: -0.6%
YTD: +3.2%

Hang Seng:
Today: +1.28% to 23,121.06 at close
Last week: -4.5%
Since 25 May: +21.8%
Since 8 Nov: -7.4%
January: +1.8%
YTD: +0.4%

Oil futures: $85.50
Gold futures: $1358.10
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3457

ECONOMY
• China reports smaller than expected trade surplus to $6.5 billion: exports rose 37.7% to $150.7 billion; while imports rose 51% to $144.3 billion
• Rural roads to receive $4.6 billion of spending in 2011
• Fighting the drought remains tough despite fresh snow
• State Grid power consumption rises 9.4%

MONEY
• Yuan stable ahead of G20 finance chiefs’ meeting in Paris later on this week
• China acts to adjust the reserve ratios for some small banks, says the Securities Journal
• Domestic takeovers by foreign companies to be reviewed
• UBS to double workforce in China over five years to 1200
• IMF urges a strengthening of global monetary system and adding Yuan to SDRs
• Fidelity’s Anthony Bolton: “Rabbit that will shape China’s future”

CEMENT
• Cement demand to 12% in 2011 to some 2.1 billion tones

REAL ESTATE
• China Vanke expects a “sharp” drop in sales
• Chinese developers spread their interests beyond Shanghai and Beijing to smaller regional cities

INTERNATIONAL
• World rice output receives Asia fillip
• China and Taiwan to hold economic co-op meeting on 22 February
• China seeks economic cooperation with Zimbabwe and calls for sanctions to be lifted
• China and Guinea agree to sign cooperation accords
• PetroChina proposes paying $5.4 billion for a stake in Encana Corporations’s gas project in Canada
• North Korea discontinues talks with the South

HONG KONG
• Home prices rise

IRON & STEEL
• Kumba confirms that 2010’s net income more than doubles as Indian and China demand drives up prices; and forecasts Chinese demand to rise 5 to 10% this year
• Kumba says Thabazimbi mine expansion project is not open to ArcelorMittal in the RSA
• Rio Tinto’s 2010 pretax profit rise 161% to $20.6 billion on iron ore prices in China; and launches $5 billion share buy-back
• Rio Tinto extends Riversdale offer as CSN lifts stake
• Dry bulk shipping rates may rise over the next six months says Deutsche Bank; but they are still down 34% year-to-date
• India allows accumulated stocks of iron ore to be shipped from Karnataka; in temporary lift of export ban

Interesting vacation

2011-02-09T00:09:00.000-08:00

“Holidays have no pity”, according to Italian poet Eugenio Montale (1986-1981) and so it was with the Chinese New Year vacation as, effective today, the PBOC has raised interest rates (for the third time since mid-October). This means that the benchmark one year lending rate will increase 25 basis points from 5.81 to 6.06%; and so will the core deposit rate - by the same amount - to 3.0% (with five year deposits attracting 45 basis points extra).

Inflation, of course, is the party pooper with the hawks looking for as much as even 6.0% in January when the figures are promulgated next week (the consensus forecast is 5.3%). This also means that ‘the birds of prey’ expect as many as three or four further hikes in interest rates this year. But was the increase in rates a surprise? No, but human nature being what it is, expectation and actuality are two different things.

That said, at least one eagle-eye was pragmatic. For example, Gavin Parry, MD of the eponymous Hong Kong-based Parry International Trading said “a rate rise was expected, but given they delayed to the end of Chinese New Year, it created anxiety over the potential severity. Now that uncertainty is removed, the markets can focus on the January trade, and the producer prices and consumer price data next week. At least there’s a bit more stability on a sentiment basis. I think it’s going to wash through and we can carry on”.

Unsurprising, too, is the rise in the Yuan towards a 17 year high. This morning it was up 0.2% at 6.5824 to the US dollar (in the first day of trading since 1 February). Meantime, Twelve-month Non-deliverable Forwards strengthened to 6.4230, reflecting bets the currency will rise 2.5%. However, the consensus view is for +4.5% to circa 6.3; with the most extreme view (Clariden Leu) at 6.0. Similarly, the one year interest rate swap rate rose the most in more than two years i.e. 22 basis points to 3.87% at lunchtime today. Note, too, that the US Treasury stopped short of calling China a currency manipulator in its latest report.

In other news during the holidays, veteran investor icon, Barton Biggs, reiterated his positive views on China at a conference in New York. “I think China is going to be one of the two or three, maybe the best major markets in the World. Basically the Chinese have done a really superb job of engineering a soft landing. They did what we should have done going into the crisis. They applied massive stimulus very quickly. They came booming out of their slowdown. They may have overdone it a little bit”. Biggs also had advice for arch-China bear, Jim Chanos: “I suggest he go to China before he gets too negative on it”.

In real estate, developer shares predictably fell today and their sub-Index within the Shanghai Composite was the worst industry group (from five) performer at -2.1%. Citigroup, however, said that Chinese interest rates are not powerful enough to halt home buying. And, while policy tightening has become more meaningful, homebuyers have already factored in reasonable increases in borrowing costs. Nonetheless, Premier Wen Jiabao, in a New Year speech, pledged to restrain property speculation and add more affordable housing.

Elsewhere, droughts in China may threaten grain harvest (but ironically heavy snow falls may ease the former). As a Nation, too, it continues to invest in Africa, with the latest targets Zimbabwe, Congo and Kenya.

As is well documented, we are now in the Year of the Rabbit which is the fourth animal in the 12 year cycle of the Chinese Zodiac. It is, reputedly, one of energy and optimism and the perfect time to try something new. Similarly, if you are bold and confident the year should bring great rewards. It is also, apparently, a good one for metals.

“A clever rabbit will have three openings to its den” - Chinese proverb

Shanghai Composite:
Today: -0.89% to 2,774.07 at close
Last week: +0.3%
Since 5 July: +17.4%
Since 8 Nov: -12.2%
January: -0.6%
YTD: -1.2%

Hang Seng:
Today: -1.36% to 23,164.03 at close
Last week: +2.0%
This week: -3.1%
Since 25 May: +22.0%
Since 8 Nov: -7.1%
January: +1.8%
YTD: +0.6%

Oil futures: $87.52
Gold futures: $1365.40
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3650

INTEREST RATES
• China raises interest rates to slow inflation – for third time since October last year
• More rate increases to come…….
• Rate decision should be “well received”, says Daiwa
• Julius Baer looks to the Yuan at 6.2 to 6.4 to the US dollar
• The delay in the interest rate increases caused “anxiety”, says Parry International

MONEY
• Yuan forges towards 17 year high on interest rate rise
• Interest rate swaps rise the most in more than two years

ECONOMY
• Barton Biggs says Asian stocks will beat the S&P in next year; and is “big bull” of China
• Nassim Taleb is “comforted” by Russia but nervous about the US and China
• Roubini says China and other of the World's emerging markets face a risk of "hard landing"
• Morgan Stanley’s Roach says the US faces a decline in the dollar as China relies less on its exports

REAL ESTATE
• Developers shares fall on rate rise
• Wen pledges to control property speculation in New Year speech

INTERNATIONAL
• US Treasury says China needs to do more on the Yuan but refrains from calling the Nation a currency manipulator
• North Korea meets South for first time since artillery attack
• China sells Japanese debt
• Asia need to raise interest rate to avoid over-heating and a “hard landing”, says IMF
• China seeks access to diamonds and platinum in Zimbabwe
• China Loans $368 million to Congo for Hydroelectric Plant
• China may take over $826 million Kenyan road project
• Chinese steel drill pipe exporters to face US dumping duties

DOMESTIC
• Droughts affect wheat and other grain crops
• Snow in northern China may relieve drought
• China’s largest energy users raise efficiency 20%
• Private business exports reach $481.3 billion – up 223% since 2005
• Private -business tax hits Yuan 1.1 trillion – up 172% since 2005

HONG KONG
• Home sales in January fall 16.5% on December

IRON & STEEL
• Iron ore import prices to China may rise after the New Year holidays, says Deutsche Bank
• Iron ore price to rise 21% this year, says Credit Suisse (NB this is a reiteration from January)
• Asia’s number three iron ore miner, NMDC, sees Q3 net profit rise four fold on iron ore prices
• BHP Vale and Rio are set for record profits (totalling $52 billion) on iron ore pricing; as steel makers go the other way
• Vale may build an iron ore shipping port in northern Brazil in 2015
• Nippon Steel and Sumitomo Metal to merger and create World number two…..and Kobe Steel may also be asked to join merger
• Kobe Steel’s Q3 profit doubles on Asian demand
• CSN increases it stake in Usiminas (part owned by Nippon Steel)
• CSN raises its stake in Riversdale, which is subject to $4 billion Rio Tinto takeover bid
• ArcelorMittal’s share price advances to a nine month high on its 2010 performance – which was the best 12 months for industry volumes (+15%) for more than 50 years; and it continues to seek further direct ownership of iron ore

100 not out

2011-02-01T00:37:00.000-08:00

The Americans are sceptical about the game of cricket. “How can you play for five days and have a tie?”, they ask. In any event, to the aficionado, it is a game of sublime skill and tactics. At its most simple, too, there are a number of key benchmarks of success (or otherwise), with perhaps the most renowned being scoring an unbeaten century i.e. 100 runs not out – which is like scoring 100 points. With this in mind, I am delighted to tell you that today marks my century in official blogs on China – having been launched, on to an unsuspecting public, in May last year.

The subject of my musings, however, is not so fortunate. And, at this time, I liken China to a batter in a cricket match who wants (like all players) to score 100, but who is stuck on about 60. This is a respectable score but not enough to win. Something has to give or, at least, go very right; and, for a start, a few slower balls coming towards him would be a start.

The first of these would be inflation which is expected to have continued at a fast pace in January to more than 5%. Its trajectory, too, was underlined by at least one of today’s brace of PMI surveys. On the one hand, the Logistics Federation said it’s PMI for manufacturing dipped in January from 53.9 to a lower-than-expected 52.9 (albeit anything above 50 indicates continued expansion). But, on the other, input prices rose from 66.7 to 69.3. Similarly, the State Council said, that while a slowdown in industrial output may be “bottoming out”, inflationary pressure appears to be rebounding. It also added that slower output growth in real estate related industries such as furniture, textiles, glass and cement needs attention. Elsewhere, the HSBC/Markit PMI for January inched up from 55.4 to 54.5.

Interestingly, the Shanghai Composite rose for a fifth consecutive trading day (as did stock futures) and the gain since 24 January is now 4.5%. Maybe the bulls are winning? With two of these being Prudential Financial and USAA Investment Management who point out that Chinese stock valuations are at a record low versus Hong Kong: 11.7x estimated 2011 earnings versus 17.5x based on the MSCI China Index (on Monday). For its part, too, USAA said “the valuation disparity will probably return to normal. Chinese regulators are trying to engineer a soft landing-type of situation and they will probably be able to manage that. That would make for a decent buying opportunity”.

This toing and froing is also evident in the money markets. For example, the PBOC has set an M2 growth target this year of +16% to help slow credit growth and inflation (in 2010, M2 grew at 19.7%). However, the China Securities Journal says that January’s loans were probably around Yuan 1.1 trillion and that Q1 could soar to Yuan 3 trillion which is 35 to 40% of the full year target. Despite this, a time-out has come from the seven day repurchase rate (which measures available funding) as it fell by the most since October 2007 i.e. down 4.88 to 3.30%.

The same goes in the real estate test match, where SouFun says that January saw the largest month-on-month rise (1%) in house prices in six months. Similarly, Citibank says that the residential market is headed for a bubble because investment here is equivalent to 6.1% of nominal GDP (the same as in the US in 2005). Nonetheless, SouFun also said that sales volumes slumped in 23 of the 30 cities it monitors closely, with 15 of them declining by more than 20% in January from December. Similarly, CICC says transaction volumes are now expected to drop 10% this year to 940 million square metres (it was earlier looking for a 5% rise). Lending to developers and mortgage loans may also both fall by 30% this year, it added. Elsewhere, ICBC has reportedly abandoned its 15% mortgage rate discount for first time buyers and CCTV claims that Shanghai may extend is property tax trial from new homes to existing ones.

As Hu and his team-mates pack their kit for the Chinese New Year tour, they will also realise that ‘sublime skill and tactics’ will be needed to win this particular game.

“Cricket is a most precarious profession; it is called a team game but, in fact, no one is so lonely as a batsman facing a bowler supported by ten fieldsmen and observed by two umpires to ensure that his error does not go unpunished” - John Arlott

Shanghai Composite:
Today: +0.30% to 2,798.96 at close
This week: +0.3%
Since 5 July: +18.4%
Since 8 Nov: -11.4%
January: -0.6%
YTD: -0.3%

Hang Seng:
Today: +0.15% to 23,482.95 at close
This week: +0.2%
Since 25 May: +23.7%
Since 8 Nov: -5.9%
January: +1.8%
YTD: +1.9%

Oil futures: $91.80
Gold futures: $1339.60
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3723

ECONOMY

Manufacturing growth slows but causes divergent views
China may face increasing difficulty in meeting the future demand for food
Former PBOC advisor says Chinese growth rate may be lower than 8% in next five years

REAL ESTATE

Home prices in January rise by the most (1%) in six months, says SouFun
China's housing market is heading for a bubble based on international empiricism, says Citigroup i.e. it already accounts for 6.1% of GDP

MONEY

Interest rate swaps fall by the most in more than eight weeks; as the money market rate falls the most since October 2007
China sets M2 target growth at 16% this year and underlines risk of inflation
Yuan rises for first day in four to 6.5924
Q1 loans may be as much as Yuan 3 trillion ($45.7 billion), says China Securities Journal
Shanghai’s SAFE warns about “hot money” entering property and equity markets
China is reported to be planning to raise the capital ratios for its major banks
Lending rates rise faster than the PBOC benchmark
China’s 10 year bonds fall due to a shortage of bank cash; as yields nudge highest level since 2008
Dim Sum bond yields may rise as funds are allowed to go ‘onshore’

EQUITIES

Shares in China show record discount to Hong Kong – which means “buy”, says Prudential Financial and USAA

HONG KONG

Hong Kong weekend sales of existing home falls 34%, says the Centaline agency
Yuan deposits rise 13% in Hong Kong to a new record level of Yuan 314.9 billion

Death and taxes.....

2011-01-28T00:53:00.000-08:00

.....are life’s only two guarantees. Fatalistic and sardonic? Yes. True? Also yes. There is a third sure thing in life, too, but propriety prevents from mentioning it here. In terms of who said it, there is something of a debate and the list includes Daniel Defoe (author of ‘Robinson Crusoe’ in 1719), Benjamin Franklin (1706-90) and Margaret Mitchell in ‘Gone With the Wind’ (1936).

In China, the real estate market is not dead; in fact it is in rude health (and was the World’s number one again last year with 34% of global transactions). But it is going to be taxed (finally) and the Government, from yesterday, has implemented a trial property levy on some houses in Shanghai and Chongqing. In the Capital, the charge will be 0.6% for all taxable residential properties (reduced to 0.4% for some cheaper units), while in Chongqing (the World’s largest City with some 32 million souls) only homes bought at more than twice the average price will be taxed (with units purchased at more than four times the average taxed at 1.2%). Property tax revenue, however, will be used to build more low income housing.

In fact it has been a busy week for real estate legislation as on Wednesday the Government announced that it will raise the minimum down-payment for second home purchases (from 50 to 60%) and ask local authorities to set price targets for new properties based on regional economic growth and disposable incomes. The Cabinet also asked local governments to boost land supply.

Reactions have been mixed, with developers shares prices up, down, up and then down again. Similarly, if you are Goldman Sachs you welcome it: “given the limited scope and moderate tax rate, we expect this new policy to have limited incremental impact on transaction volume and price”; and “the policy uncertainties are now substantially lowered”. Conversely, Credit Suisse’s view is that the sooner-than-expected implementation of the property tax trials will further weaken market sentiment and reduce transaction volume. Similarly, Housing Ministry officials have apparently told CS that more cities may implement the tax soon. Meantime, Citigroup called the measures “harsh”, while Deutsche was somewhere in the middle.

In my view it is good news for the plans to be both promulgated and implemented i.e. any policy over-hang is gone. The levy itself, too, is minimal – especially when compared with the China Business TV’s 4.0% story earlier this week. Similarly, as JLL has commented, Government policies are intended to prevent prices from rising too quickly rather than driving prices down. Finally, more supply of both land and units is good news all the way around. My only slight concern is just how the setting of prices by local authorities will work in practice.

In the broader market, the repo rate has increased 84 basis points this week to reach a very sporty 8.14% ahead of the New Year vacation (and at one stage was 8.30%). High School economics tells you that if demand for something is high, and supply constrained, then the price of that good or service will rise. For example, lending through 24 January is reported (by China Business News) to have reached Yuan 1.2 trillion ($182 billion) which compares with Yuan 481 billion for the whole month of December. Similarly, the Yuan (6.5852 this morning) continues to trade near a 17 year high and Yuan Forwards point to +2% over the next 12 months.

In the rarified air of Davos - and the World Economic Forum - there have been mixed-to-positive views so far. For example, the IMF has increased its forecast for World economic growth from 4.2 to 4.5% this year (the 4.5% for 2012 remains unchanged); okay it comes with a raft of health warnings. Also in Davos, Li Daokui, an academic advisor to the PBOC, said that he did not expect a “hard landing” in China and that growth will be about 9.5% this year.

Equities, meantime remain moribund (-2% YTD) but off their worst (+2.8%) for January, albeit Citic Securities says we are at a “valuation bottom” akin to that of 2008 (when the Shanghai Composite was 1700). That said, a Bloomberg poll of 1000 of its customers found that 45% of them expect a financial crisis within five years; and a majority (53%) think the Nation is in a bubble.

In defence of China and its - long term consumer - though, Apple’s four stores in China generate higher revenue than anywhere else (even Fifth Avenue) and Morgan Stanley says the Company will triple sales this year in China to $9.4 billion. In the same vein Prada is to launch a $10 billion IPO in Hong Kong on the back of luxury Chinese demand which is set to rise 20 to 25% over the next 10 years. Plus, McDonald’s (‘Hamburger’) University in China is harder to get into than Harvard.

And finally, plaudits go to Li Na, the first Chinese player to reach a Grand Slam tennis singles final, in Melbourne.

“Life is like a game of tennis; the player who serves well seldom loses” – Anon

Shanghai Composite:
Today: +0.13% to 2,752.75 at close
This week: +1.4%
Since 5 July: +16.5%
Since 8 Nov: -12.9%
December: -0.4%
2010: -14.3%
YTD: -2.0%

Hang Seng:
Today: -0.68% to 23,617.02 at close
This week: -1.1%
Since 25 May: +24.4%
Since 8 Nov: -5.4%
December: +0.1%
2010: +5.3%
YTD: +2.5%

Oil futures: $85.41
Gold futures: $1314.90
(new ‘immediate delivery’ high of $1431.25 on 7 December)
Euro/$ spot: 1.3684

REAL ESTATE

China approves property tax trials in Shanghai and Chongqing
China increase down payments on second homes (up from 50 to 60%) and outlines plans to boost land supply and set new property price targets
China is World number one on real estate transactions, for second year running, with $197 billion worth in 2010 and a 23% increase year-on-year
Xinyuan to Seek private investors in absence of bank loans

MONEY

Money market rates rise ahead of New Year vacation
Yuan trades near 17 year high
Domestic lending to real estate hit Yuan 2 trillion in 2010; plus Yuan 80 billion borrowed from foreign sources
Bank rates rise up to 1.45 times the benchmark, says Securities Journal

EQUITIES & ECONOMY

China will face crisis within five Years, say 45% of investors
IMF's Zhu warns US and China in global imbalances
Stocks are at a “valuation bottom”, says Citic Securities
China will let foreign funds use index futures

DOMESTIC

China's electricity demand growth may slow to 9% in 2011, says NEA Reduction in import taxes from 20 to 10% on personal computers and digital cameras
Apple stores in China outsell all others including Fifth Avenue

INTERNATIONAL

IMF raises global 2011 GDP estimates on stronger US growth
South Korea proposes first talks, on 11 February, with North since the island shelling incident
China is leading in the ‘green economy race’ says UN

HONG KONG

Hong Kong is World's most expensive housing market
Prada plans Hong Kong IPO on back of rising China luxury demand which will rise 20-25% over 10 years

IRON & STEEL

Steel futures in Shanghai rise to new record level on price of iron ore
China’s list steel prices may rise after the holidays, says CISA; as spot prices continue to rise daily
China top 10 steelmakers increase market share in 2010
Kumba has request for Sishen Mine rights rejected by the South African Government
ArcelorMittal and Nunavut waive minimum yendor condition on bid for Baffinland
Glencore is to target raising some $2.5 billion in Hong Kong and London IPO
Zijin Mining may convert Glencore bonds into IPO stock