“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
Friday, 5 August 2011
Thursday, 4 August 2011
Real estate special (August No. 1): predator-free dry land
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”.
- 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”.
Monday, 1 August 2011
Iron & steel weekly: Wilde about ore
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
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
Monday, 25 July 2011
Tragedy
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
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
Sunday, 24 July 2011
Iron & steel weekly: $1,624.07
Chrysopoeia is the transmutation of base metals into gold or silver and is more commonly know as alchemy. Okay, despite four millennia trying, no one has actually been successful; albeit with gold at more than $1,620 per ounce it feels like it.
But it would be errant to ignore base metals (despite them being less glamorous) and, in particular, iron ore which has doubled in price in three years. It is also a less fickle bed fellow and top consultants (and part-time sleep counsellors), MEPS International, agree. For example, they reckon that China’s iron ore demand will rise 8.5% this year (i.e. 2011) to 1.07 billion tons.
In turn, this comes after record global steel production in June: up an annualised 8% to 127.8 million tonnes (China also hit a new high in June). Yes, the rate of growth may ease in Q3, but Ernst & Young is on record as saying that global steel production is set to rise 7% in 2011 on the back of China and India. Taking this a step further, Kumba Iron Ore Limited (see below) says that Chinese steel production will grow by an annualised 8% in H2.
- Kumba
As you can imagine, Kumba, the World’s fourth largest supplier of seaborne iron ore (62.3% owned by a grateful Anglo American), is enjoying its days in the sun. Its H1 net profit rose 40% - mostly on price appreciation - to Rand 9.05 billion ($1.32 billion). Volumes were static at 22 million tons (which is good given the wet weather in South Africa) but, with international customer prices up 56%, H1 sales climbed 35% to Rand 24.1 billion. This also meant that net margins rose from their already astonishing level of 36.4 to 37.6%. The Company was also generous with shareholders, hiking its interim dividend by 61% (to Rand 13.50 per share) with cover edging down from 1.5 to 1.3x.
In addition, Kumba is looking to expand in West Africa with a notional target of 10 to 20 million tons of output by 2020. However, nearer term, the Company expects “modest downward pressure” on iron ore prices in H2, as crude steel production seasonally eases; its full year costs are also predicted to rise 25%.
- the big three + 1 are bulls on China
Nonetheless, Kumba is another one benefiting from demand in China, a view endorsed by number three iron ore supplier BHP Billiton, which has just reported record production for an 11th year, driven by sales to China (in Q4 volumes rose 14% to 35.2 million tonnes). World number one, Vale said the same thing earlier in July i.e. it sees no slowdown from Chinese customers as the Country seeks to build 36 million low income houses over the next five years. And, finally, second in line to the throne, Rio Tinto, reported last week that its iron ore volumes rose 12% in Q2.
- India
Elsewhere, there is ‘trouble at mill’ in India, the World’s third largest national source of iron ore exports. In a Reuters opinion poll, the conclusion is that volumes shipped internationally could fall by a fifth to 71.25 million tonnes in the year to March 2012. This is due principally to a number of export restrictions at a national and local level; tariffs and higher costs are also factors. Furthermore, the Federation of Indian Minerals Industries reckons the tally could go as low as 64 million tonnes.
- Freights costs
On the high seas, perhaps the largest-ever over supply of ships has led freight prices to their lowest level in 10 years – relative to the cost of iron ore. For example, an iron ore voyage from Brazil to China now costs 10% of the value of its cargo – compared with 64% in 2003, according to data from Fernley Consultants. They also say that shipping rates will not rise until at least 2013. For the record, the Baltic Exchange says that capesize charter rates per day are now $11,314 for a one-off trip, compared with $234,000 in June 2008.
- Valemax
Meantime, Vale’s new, huge valemax iron ore carrier has sailed to Italy rather than China. Apparently, this was due to draft restrictions at Dalian not having been sorted out and a request from a European customer who needed raw material. Really? For the record, the ‘Vale Brasil’ is 362 metres long, which is one-and-a-half times the length of London’s Tower Bridge. It is also the first of 19 such behemoths planned at a cost of $2.3 billion; and, it is reported that, Vale will control another 16 under long term contracts. Number two, the China-built and eponymous ‘Vale China’ will start work in a couple of months with the remainder expected by the end of 2013. Vale may also revive plans to build an iron ore distribution centre in China; and this could well be similar to its $1.37 billion maritime terminal nearing completion in Malaysia.
- Posco
There is also expansive news from the World’s third largest steelmaker, Posco, which reported a 23% increase in Q2 net profit to Won 1.37 trillion ($1.3 billion) as a recovery in demand allowed it to increase prices. Sales did even better with a gain of 58% to Won 17.05 trillion; which also means net margins eased from 10.3 to 8.0% (compare these returns with those of Kumba - above - which are around 38%). Posco raised the price of benchmark hot-rolled steel plates by about 18% in April, albeit this compares with the 25% more it paid for iron ore in the June quarter versus March (and some 47% extra for coking coal).
- Goldmans, Citi & ThyssenKrupp
Finally, Goldman Sachs, which began to trade iron ore swaps earlier this year, is now preparing to enter the physical iron ore market, it is reported; and, Citigroup is doing the same. The belief is that it can offer an even better service with a foot in both camps, so to speak. There could well be a better margin in it too, I reckon. In any event both will be pleased with ThyssenKrupp’s view that iron ore prices will fall in 2014 at the earliest. How do they know?
“Nothing gold can stay” - Robert Frost
But it would be errant to ignore base metals (despite them being less glamorous) and, in particular, iron ore which has doubled in price in three years. It is also a less fickle bed fellow and top consultants (and part-time sleep counsellors), MEPS International, agree. For example, they reckon that China’s iron ore demand will rise 8.5% this year (i.e. 2011) to 1.07 billion tons.
In turn, this comes after record global steel production in June: up an annualised 8% to 127.8 million tonnes (China also hit a new high in June). Yes, the rate of growth may ease in Q3, but Ernst & Young is on record as saying that global steel production is set to rise 7% in 2011 on the back of China and India. Taking this a step further, Kumba Iron Ore Limited (see below) says that Chinese steel production will grow by an annualised 8% in H2.
- Kumba
As you can imagine, Kumba, the World’s fourth largest supplier of seaborne iron ore (62.3% owned by a grateful Anglo American), is enjoying its days in the sun. Its H1 net profit rose 40% - mostly on price appreciation - to Rand 9.05 billion ($1.32 billion). Volumes were static at 22 million tons (which is good given the wet weather in South Africa) but, with international customer prices up 56%, H1 sales climbed 35% to Rand 24.1 billion. This also meant that net margins rose from their already astonishing level of 36.4 to 37.6%. The Company was also generous with shareholders, hiking its interim dividend by 61% (to Rand 13.50 per share) with cover edging down from 1.5 to 1.3x.
In addition, Kumba is looking to expand in West Africa with a notional target of 10 to 20 million tons of output by 2020. However, nearer term, the Company expects “modest downward pressure” on iron ore prices in H2, as crude steel production seasonally eases; its full year costs are also predicted to rise 25%.
- the big three + 1 are bulls on China
Nonetheless, Kumba is another one benefiting from demand in China, a view endorsed by number three iron ore supplier BHP Billiton, which has just reported record production for an 11th year, driven by sales to China (in Q4 volumes rose 14% to 35.2 million tonnes). World number one, Vale said the same thing earlier in July i.e. it sees no slowdown from Chinese customers as the Country seeks to build 36 million low income houses over the next five years. And, finally, second in line to the throne, Rio Tinto, reported last week that its iron ore volumes rose 12% in Q2.
- India
Elsewhere, there is ‘trouble at mill’ in India, the World’s third largest national source of iron ore exports. In a Reuters opinion poll, the conclusion is that volumes shipped internationally could fall by a fifth to 71.25 million tonnes in the year to March 2012. This is due principally to a number of export restrictions at a national and local level; tariffs and higher costs are also factors. Furthermore, the Federation of Indian Minerals Industries reckons the tally could go as low as 64 million tonnes.
- Freights costs
On the high seas, perhaps the largest-ever over supply of ships has led freight prices to their lowest level in 10 years – relative to the cost of iron ore. For example, an iron ore voyage from Brazil to China now costs 10% of the value of its cargo – compared with 64% in 2003, according to data from Fernley Consultants. They also say that shipping rates will not rise until at least 2013. For the record, the Baltic Exchange says that capesize charter rates per day are now $11,314 for a one-off trip, compared with $234,000 in June 2008.
- Valemax
Meantime, Vale’s new, huge valemax iron ore carrier has sailed to Italy rather than China. Apparently, this was due to draft restrictions at Dalian not having been sorted out and a request from a European customer who needed raw material. Really? For the record, the ‘Vale Brasil’ is 362 metres long, which is one-and-a-half times the length of London’s Tower Bridge. It is also the first of 19 such behemoths planned at a cost of $2.3 billion; and, it is reported that, Vale will control another 16 under long term contracts. Number two, the China-built and eponymous ‘Vale China’ will start work in a couple of months with the remainder expected by the end of 2013. Vale may also revive plans to build an iron ore distribution centre in China; and this could well be similar to its $1.37 billion maritime terminal nearing completion in Malaysia.
- Posco
There is also expansive news from the World’s third largest steelmaker, Posco, which reported a 23% increase in Q2 net profit to Won 1.37 trillion ($1.3 billion) as a recovery in demand allowed it to increase prices. Sales did even better with a gain of 58% to Won 17.05 trillion; which also means net margins eased from 10.3 to 8.0% (compare these returns with those of Kumba - above - which are around 38%). Posco raised the price of benchmark hot-rolled steel plates by about 18% in April, albeit this compares with the 25% more it paid for iron ore in the June quarter versus March (and some 47% extra for coking coal).
- Goldmans, Citi & ThyssenKrupp
Finally, Goldman Sachs, which began to trade iron ore swaps earlier this year, is now preparing to enter the physical iron ore market, it is reported; and, Citigroup is doing the same. The belief is that it can offer an even better service with a foot in both camps, so to speak. There could well be a better margin in it too, I reckon. In any event both will be pleased with ThyssenKrupp’s view that iron ore prices will fall in 2014 at the earliest. How do they know?
“Nothing gold can stay” - Robert Frost
Monday, 18 July 2011
Real estate special (July No. 4): The Good, the Bad and the Soft
The good news is that new house prices continue to rise; the bad news is that new house prices continue to rise......
Tautology or not, it is, on the one hand, encouraging to see that house prices in China continue to rise (+4.1% in June year-on-year), which underlines the vibrancy of the economy. The risk is, though, that the Government will throw the baby out with the bathwater of (even more) property market restrictions.
Indeed, it should take the month-on-month temperature of the water (an increase of +0.1%) as a guide to it getting cooler. Raised interest rates and reserve ratio requirements, higher deposits levels (now 30% for first time buyers; and in some cases 40%) and, the most incisive, HPRs or house purchase restrictions are doing their job; and the latter are to be extended now to tier 2 and 3 cities. As JLL eloquently says, the Government wants stabilisation in prices, not to drive them down i.e. the primary intention is to flatten prices out and stop them rising faster than incomes. It is also stoking up the supply of affordable houses (36 million over the next five years).
Right now, the Government needs to be patient and I believe it will be. And just like the economy at large, this key sub-sector will land ‘at a sufficiently low velocity for the equipment or occupants to remain unharmed’.
“I don't believe in pessimism. If something doesn't come up the way you want, forge ahead. If you think it's going to rain, it will”
- Clint Eastwood
DETAIL
NEW HOME PRICES IN THE PRC, JUNE 2011 (% CHANGES):
Nationally: +4.1 year-on-year (+4.1 in May); and +0.1 in month (+0.2 in May)
Beijing: +2.2 yoy (+2.1); & +0.0 (+0.1)
Chongqing: +5.8 yoy (+5.2); & +0.0 (+0.2)
Guangzhou: +5.4 yoy (+5.1); & +0.2 (+0.3)
Shanghai: +2.2 yoy (+1.4); & +0.1 (+0.2)
Shenzen: +4.6 yoy (+3.7); & +0.1 (+0.4)
Tianjin: +3.9 yoy (+3.4); & -0.2 (-0.3)
New home prices rose in June by 4.1% and in 67 out of 70 Chinese cities, monitored by the National Bureau of Statistics; the same numbers as in May. It is also the case that in a majority of cities, June’s rate of annual increase exceeded that of March. On a month by month basis, though, the rate of increase nationally was just 0.1% which is down from +0.2% in May; and this is the sixth month in a row that the monthly rate has dipped against the previous one.
In Beijing and Shanghai the rate of annual increase in June was higher than May (albeit below the national average). This was especially true of Shanghai (2.2% versus 1.4%) which showed the largest points gain of the six selected cities above. Gains here also came despite Government constraints on the market.
Once more, on a monthly basis, too, it is a more stark picture – and here Shanghai slowed from +0.2 to +0.1%, while Beijing was flat in June against May’s +0.1% (meantime, existing home prices in Beijing were up by an annualised 1.4% in June from a year ago, while in Shanghai they increased by 2.4%).
Finally, in terms of extremes, Urumqi in Xinjiang Province posted the biggest gain in new house prices in June at 9.2% yoy in June, while Sanya on Hainan island experienced the biggest fall of 2% last month on a year ago.
As noted previous, the value of national residential sales in H1, rose 22% to Yuan 2.1 trillion; and in the month of June alone by 31% to Yuan 499.2 billion.
In JLL’s view, the price increases in Shanghai and Beijing are modest and reflect, in particular, the home purchase restrictions (HPRs) which have probably been the most strictly enforced here. These work on the basis that per household you cannot own more than two units in any of 36 cities. In turn, this means that at the top end of the market in Beijing, prices are beginning to come down.
However, the Government wants stabilisation in prices, not to drive them down, continued JLL i.e. the primary intention is to flatten prices out and stop them rising faster than incomes. It also said that most of the large developers are quite optimistic and that they are taking market share from smaller local developers. Nonetheless, inventories are rising. For example, housing starts rose 40% last year and, to date in 2011, sales are running at 22%. In the same vein, GF Securities said that unsold homes in 11 major cities reached 634,000 units as of 10 July, which will take 9.8 months to de-stock based on the current rate of sales.
ANZ took a slightly different tack. “China has negative interest rates right now with high inflation, so it’s not surprising that people are back to higher yielding assets, such as real estate”. However, it added, that any more home purchase restrictions will force developers to cut supplies and push up home prices again. “This will go against the Government’s will to control home prices”.
Credit Suisse added that “China is still largely a policy driven market. The Government is still confident it can manoeuvre it. We do see the market continue to weaken, but we’re not pricing in any hard landing”.
Finally, Cheung Kong Holdings, controlled by Hong Kong billionaire Li Ka-shing, also said that it was “proper and adequate” for China to cool down its real estate market. Rising home prices run the risk of becoming a social problem, said Executive Director, Justin Chiu, in Shanghai, where he showcased three new projects. “We do hope prices will remain stable, otherwise the Government will take more action. As a property developer, we don’t want prices to rise too quickly either and want prices to be stable”.
China will expand its efforts to control the growth in residential prices to smaller cities after limiting home purchases in Beijing and Shanghai, according to the State Council. It said that so-called second and third tier cities, which have seen excessive price gains, should restrict the number of homes each family is allowed to buy. It is also reported that commercial banks are restricting individual property loans.
For its part the State Council said “the property policies are at a critical moment. We must strictly uphold the direction of the curbs and won’t ease the tightening measures”. The Government will also seek to constrain residential rental growth and it has committed to building 36 million units of social or affordable housing over the next five years, with up to 10 million coming this year (although this 2011 target seems optimistic). Similarly, Premier Wen Jiabao said “we will unswervingly implement property tightening measures. We will continue curbing irrational housing demand, increase efforts to build affordable and modest homes”.
Tautology or not, it is, on the one hand, encouraging to see that house prices in China continue to rise (+4.1% in June year-on-year), which underlines the vibrancy of the economy. The risk is, though, that the Government will throw the baby out with the bathwater of (even more) property market restrictions.
Indeed, it should take the month-on-month temperature of the water (an increase of +0.1%) as a guide to it getting cooler. Raised interest rates and reserve ratio requirements, higher deposits levels (now 30% for first time buyers; and in some cases 40%) and, the most incisive, HPRs or house purchase restrictions are doing their job; and the latter are to be extended now to tier 2 and 3 cities. As JLL eloquently says, the Government wants stabilisation in prices, not to drive them down i.e. the primary intention is to flatten prices out and stop them rising faster than incomes. It is also stoking up the supply of affordable houses (36 million over the next five years).
Right now, the Government needs to be patient and I believe it will be. And just like the economy at large, this key sub-sector will land ‘at a sufficiently low velocity for the equipment or occupants to remain unharmed’.
“I don't believe in pessimism. If something doesn't come up the way you want, forge ahead. If you think it's going to rain, it will”
- Clint Eastwood
DETAIL
NEW HOME PRICES IN THE PRC, JUNE 2011 (% CHANGES):
Nationally: +4.1 year-on-year (+4.1 in May); and +0.1 in month (+0.2 in May)
Beijing: +2.2 yoy (+2.1); & +0.0 (+0.1)
Chongqing: +5.8 yoy (+5.2); & +0.0 (+0.2)
Guangzhou: +5.4 yoy (+5.1); & +0.2 (+0.3)
Shanghai: +2.2 yoy (+1.4); & +0.1 (+0.2)
Shenzen: +4.6 yoy (+3.7); & +0.1 (+0.4)
Tianjin: +3.9 yoy (+3.4); & -0.2 (-0.3)
New home prices rose in June by 4.1% and in 67 out of 70 Chinese cities, monitored by the National Bureau of Statistics; the same numbers as in May. It is also the case that in a majority of cities, June’s rate of annual increase exceeded that of March. On a month by month basis, though, the rate of increase nationally was just 0.1% which is down from +0.2% in May; and this is the sixth month in a row that the monthly rate has dipped against the previous one.
In Beijing and Shanghai the rate of annual increase in June was higher than May (albeit below the national average). This was especially true of Shanghai (2.2% versus 1.4%) which showed the largest points gain of the six selected cities above. Gains here also came despite Government constraints on the market.
Once more, on a monthly basis, too, it is a more stark picture – and here Shanghai slowed from +0.2 to +0.1%, while Beijing was flat in June against May’s +0.1% (meantime, existing home prices in Beijing were up by an annualised 1.4% in June from a year ago, while in Shanghai they increased by 2.4%).
Finally, in terms of extremes, Urumqi in Xinjiang Province posted the biggest gain in new house prices in June at 9.2% yoy in June, while Sanya on Hainan island experienced the biggest fall of 2% last month on a year ago.
As noted previous, the value of national residential sales in H1, rose 22% to Yuan 2.1 trillion; and in the month of June alone by 31% to Yuan 499.2 billion.
In JLL’s view, the price increases in Shanghai and Beijing are modest and reflect, in particular, the home purchase restrictions (HPRs) which have probably been the most strictly enforced here. These work on the basis that per household you cannot own more than two units in any of 36 cities. In turn, this means that at the top end of the market in Beijing, prices are beginning to come down.
However, the Government wants stabilisation in prices, not to drive them down, continued JLL i.e. the primary intention is to flatten prices out and stop them rising faster than incomes. It also said that most of the large developers are quite optimistic and that they are taking market share from smaller local developers. Nonetheless, inventories are rising. For example, housing starts rose 40% last year and, to date in 2011, sales are running at 22%. In the same vein, GF Securities said that unsold homes in 11 major cities reached 634,000 units as of 10 July, which will take 9.8 months to de-stock based on the current rate of sales.
ANZ took a slightly different tack. “China has negative interest rates right now with high inflation, so it’s not surprising that people are back to higher yielding assets, such as real estate”. However, it added, that any more home purchase restrictions will force developers to cut supplies and push up home prices again. “This will go against the Government’s will to control home prices”.
Credit Suisse added that “China is still largely a policy driven market. The Government is still confident it can manoeuvre it. We do see the market continue to weaken, but we’re not pricing in any hard landing”.
Finally, Cheung Kong Holdings, controlled by Hong Kong billionaire Li Ka-shing, also said that it was “proper and adequate” for China to cool down its real estate market. Rising home prices run the risk of becoming a social problem, said Executive Director, Justin Chiu, in Shanghai, where he showcased three new projects. “We do hope prices will remain stable, otherwise the Government will take more action. As a property developer, we don’t want prices to rise too quickly either and want prices to be stable”.
China will expand its efforts to control the growth in residential prices to smaller cities after limiting home purchases in Beijing and Shanghai, according to the State Council. It said that so-called second and third tier cities, which have seen excessive price gains, should restrict the number of homes each family is allowed to buy. It is also reported that commercial banks are restricting individual property loans.
For its part the State Council said “the property policies are at a critical moment. We must strictly uphold the direction of the curbs and won’t ease the tightening measures”. The Government will also seek to constrain residential rental growth and it has committed to building 36 million units of social or affordable housing over the next five years, with up to 10 million coming this year (although this 2011 target seems optimistic). Similarly, Premier Wen Jiabao said “we will unswervingly implement property tightening measures. We will continue curbing irrational housing demand, increase efforts to build affordable and modest homes”.
China iron & steel weekly: Stairway to Heaven
Okay, this missive is ostensibly about iron ore (and steel), but when considering things dug from the ground, how can I ignore the new record price of gold? And, indeed, after a bumper week, it passed another milestone today as the price for immediate delivery hit $1,600.10. “There's a lady who’s sure all that glitters is gold. And she’s buying the stairway to heaven” (J. Page & R. Plant).
Back in the more prosaic ferrous world, MF Global is in a bright mood with its view that the price of iron ore is likely to remain at “elevated levels” near $160 to 170 per ton for three to five years; and the latest benchmark price I have for China is $174.10 spot (+0.6% in the week).
The World’s number two iron ore producer, Rio Tinto, was also in ‘ebulliont’ mood at its Q2 announcement saying that the market was “characterised by continued strong prices”. Similarly, iron ore volumes rose 12%, year on year, to 48.9 million metric tons; albeit assisted by no repeat of the Australian floods. Rio also plans to expand its Australian iron ore operations 50% by 2015 at a cost of some $14.8 billion. This prompted a (lyrical) Liberum Capital to say that “iron ore production will continue to surge ahead for the next four years as Rio continues to execute flawless delivery in its ramp up to 333 million tons a year by the first half of 2015”. This is up from a forecast 240 million tons this year.
Polish was also added by the World Steel Association which is forecasting steel demand to grow 6% next year as requirements from China and India increase.
Also, in China June’s daily crude steel output shone with a new record of 1.998 million tonnes in June. This is up 2.8% from May which also took the month’s tally to 59.93 million tonnes. And, in terms of all steel products, China produced 78.73 million tonnes in June, up 14.8% from a year earlier. Custeel said “the construction of social housing units has accelerated in June, fuelling strong production of long steel products”. And, in July, it is forecasting volume gains for a number of products including wire rod output to rise almost 9%.
Apparently, too, China is producing 7% or so more steel than it lets on, according to consultant Meps. This amounts to some 40 million metric tons per annum – which Meps says is roughly the amount made by Germany. Principally, this is driven by the fact that a number of plants which should have been shut down (uneconomic and dirty) have kept producing to meet local demand; but no one owns up, officially. Meps goes on to say, too, this 'extra' steel production has created higher demand for iron ore, which is one of the factors keeping its price so high; which has also damaged steelmaker profitability and profit per se. For example, since January 2009, iron ore prices have more than doubled, in contrast to a 50% rise in benchmark steel prices. In turn, analysts expect Chinese steelmaker earnings to have fallen 36% in Q2.
Not helping this is Baosteel and Wuhan’s decisions to keep their main product prices mostly unchanged in August i.e. hot-rolled coil prices flat with some grades of cold-rolled up by Yuan 30 to 50 ($6.4 to 7.7) per tonne. This follows cuts by Baosteel in its main product prices by Yuan 100 to 200 in July. Interesting, too, is the decision by Taiwan’s top steel producer, China Steel, to reduce domestic steel product prices for September by an average of 1.69% from July/August; this is said to be due to slowing global economic growth and soft demand.
Elsewhere, Sichuan Hanlong Group has offered 50 cents per share or A$1.2 billion ($1.3 billion), in cash, for the 81.4% of Australia’s Sundance Resources that it does not own – with the aim of controlling the latter’s incipient iron ore project in West Africa. The offer is 25% higher than Sundance’s share price at the close of business on Friday 15 July; although the target has asked its shareholders to sit on their hands. According to Bloomberg, however, the offer is actually 47% more than Sundance’s weighted average share price over the past 20 trading days. What's more, this compares with the average premium of 26% for takeovers of iron ore companies worth more than $1 billion during the past five years. There has also been $6.9 billion worth of iron ore producer bids this year (excluding Sundance), which is the most since a golden 2008 when deals worth $8.4 billion were announced.
Also in Australia, Fortescue, Australia’s third largest iron ore miner saw June quarter volumes rise 6%. It is also looking to buy new delivery vessels for around $500 million and says that it is undertaking some business transactions in Yuan.
And, finally, in Brazil, MMX has agreed a 10 year iron ore supply deal for five million tonnes (per annum) from 2013 at $64 per ton. Brilliant. Plus, in Canada, Advanced Explorations says that initial drill results confirm iron ore mineralisation at its Tuktu project on the Melville Peninsula in Nunavut.
“When we have gold we are in fear, when we have none we are in danger” - English proverb
HEADLINES
• Iron ore prices to remain at “elevated levels” near $160 to 170 for three to five years, says MF Global
• Global steel demand to rise 6% next year, says WSA
• Rio Tinto’s iron ore production recovers with Q2 gain of 12%
• June’s steel production in China rises 14.8% to a new record level
• Consultant says China is under-reporting its steel output by some 7% per annum
• Chinese steelmakers see Q2 earnings down 36%
• Baosteel and Wuhan to keep August hot rolled coil prices unchanged
• Taiwan’s China Steel cuts prices by an average 1.7% for September
• Rio Tinto’s iron ore production recovers with Q2 gain of 12%
• Sichuan China bids for balance (81.4%) of Sundance Resources which it does not already own; prime attraction is the target’s African iron ore project
• Fortescue Metals Group: (i) business transactions in Yuan; (ii) June quarter iron ore shipments rise 6% with new facility; and (ii) discussing $480 million ship order
• MMX shares rises on Brazilian iron ore deal.
• Advanced Explorations receives good news on its Tuktu project on the Melville Peninsula in Nunavut, Canada
Back in the more prosaic ferrous world, MF Global is in a bright mood with its view that the price of iron ore is likely to remain at “elevated levels” near $160 to 170 per ton for three to five years; and the latest benchmark price I have for China is $174.10 spot (+0.6% in the week).
The World’s number two iron ore producer, Rio Tinto, was also in ‘ebulliont’ mood at its Q2 announcement saying that the market was “characterised by continued strong prices”. Similarly, iron ore volumes rose 12%, year on year, to 48.9 million metric tons; albeit assisted by no repeat of the Australian floods. Rio also plans to expand its Australian iron ore operations 50% by 2015 at a cost of some $14.8 billion. This prompted a (lyrical) Liberum Capital to say that “iron ore production will continue to surge ahead for the next four years as Rio continues to execute flawless delivery in its ramp up to 333 million tons a year by the first half of 2015”. This is up from a forecast 240 million tons this year.
Polish was also added by the World Steel Association which is forecasting steel demand to grow 6% next year as requirements from China and India increase.
Also, in China June’s daily crude steel output shone with a new record of 1.998 million tonnes in June. This is up 2.8% from May which also took the month’s tally to 59.93 million tonnes. And, in terms of all steel products, China produced 78.73 million tonnes in June, up 14.8% from a year earlier. Custeel said “the construction of social housing units has accelerated in June, fuelling strong production of long steel products”. And, in July, it is forecasting volume gains for a number of products including wire rod output to rise almost 9%.
Apparently, too, China is producing 7% or so more steel than it lets on, according to consultant Meps. This amounts to some 40 million metric tons per annum – which Meps says is roughly the amount made by Germany. Principally, this is driven by the fact that a number of plants which should have been shut down (uneconomic and dirty) have kept producing to meet local demand; but no one owns up, officially. Meps goes on to say, too, this 'extra' steel production has created higher demand for iron ore, which is one of the factors keeping its price so high; which has also damaged steelmaker profitability and profit per se. For example, since January 2009, iron ore prices have more than doubled, in contrast to a 50% rise in benchmark steel prices. In turn, analysts expect Chinese steelmaker earnings to have fallen 36% in Q2.
Not helping this is Baosteel and Wuhan’s decisions to keep their main product prices mostly unchanged in August i.e. hot-rolled coil prices flat with some grades of cold-rolled up by Yuan 30 to 50 ($6.4 to 7.7) per tonne. This follows cuts by Baosteel in its main product prices by Yuan 100 to 200 in July. Interesting, too, is the decision by Taiwan’s top steel producer, China Steel, to reduce domestic steel product prices for September by an average of 1.69% from July/August; this is said to be due to slowing global economic growth and soft demand.
Elsewhere, Sichuan Hanlong Group has offered 50 cents per share or A$1.2 billion ($1.3 billion), in cash, for the 81.4% of Australia’s Sundance Resources that it does not own – with the aim of controlling the latter’s incipient iron ore project in West Africa. The offer is 25% higher than Sundance’s share price at the close of business on Friday 15 July; although the target has asked its shareholders to sit on their hands. According to Bloomberg, however, the offer is actually 47% more than Sundance’s weighted average share price over the past 20 trading days. What's more, this compares with the average premium of 26% for takeovers of iron ore companies worth more than $1 billion during the past five years. There has also been $6.9 billion worth of iron ore producer bids this year (excluding Sundance), which is the most since a golden 2008 when deals worth $8.4 billion were announced.
Also in Australia, Fortescue, Australia’s third largest iron ore miner saw June quarter volumes rise 6%. It is also looking to buy new delivery vessels for around $500 million and says that it is undertaking some business transactions in Yuan.
And, finally, in Brazil, MMX has agreed a 10 year iron ore supply deal for five million tonnes (per annum) from 2013 at $64 per ton. Brilliant. Plus, in Canada, Advanced Explorations says that initial drill results confirm iron ore mineralisation at its Tuktu project on the Melville Peninsula in Nunavut.
“When we have gold we are in fear, when we have none we are in danger” - English proverb
HEADLINES
• Iron ore prices to remain at “elevated levels” near $160 to 170 for three to five years, says MF Global
• Global steel demand to rise 6% next year, says WSA
• Rio Tinto’s iron ore production recovers with Q2 gain of 12%
• June’s steel production in China rises 14.8% to a new record level
• Consultant says China is under-reporting its steel output by some 7% per annum
• Chinese steelmakers see Q2 earnings down 36%
• Baosteel and Wuhan to keep August hot rolled coil prices unchanged
• Taiwan’s China Steel cuts prices by an average 1.7% for September
• Rio Tinto’s iron ore production recovers with Q2 gain of 12%
• Sichuan China bids for balance (81.4%) of Sundance Resources which it does not already own; prime attraction is the target’s African iron ore project
• Fortescue Metals Group: (i) business transactions in Yuan; (ii) June quarter iron ore shipments rise 6% with new facility; and (ii) discussing $480 million ship order
• MMX shares rises on Brazilian iron ore deal.
• Advanced Explorations receives good news on its Tuktu project on the Melville Peninsula in Nunavut, Canada
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