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2012

Mar 2012 - Year End & China

  • As the Wall Street Journal commented on 6 March 2011, "Canadian stocks posted a sharp loss on Tuesday as concerns over the global economic outlook weighed down markets, and worries about resources demand from China pushed down prices of commodities producers....index slumped 4% (-4.3%)...copper producers fell amid concerns about demand from China after it lowered its growth projection to 7.5% from 8% on Monday 5 March 2011" (China's Premier Wen Jiabao stated that a level of 7.5% was more sustainable and efficient). And again on the morning of 21 March 2012,"....stocks decline on China growth concerns...".
  • The economists must be cheering "at last !, China is (appears to be) showing signs of slowing down". After they first predicted it to occur in April 2004, following China's reduced target of 7%pa in mid-March 2004, resulting in commodity prices falling - whereas the growth rate has often been ~10%pa since then.
  • So it should be recognised that 7.5% is still a target, and hence may not be achieved. The reality is that China is being rebuilt, and a vast number of its citizens are becoming increasingly wealthy. At the China Mining Conference in November 2011, it was very clear that China appears likely to continue to fuel the commodities boom for at least the next 10 years, but does not want to pay high commodity prices, and will try and pay lower prices any way it can. We (ERA) thought that it may take ~2 years before the market begins to gloss over possible "sabre-rattling" by China trying to reduce commodity prices (it took ~2 years for the market to realise that there were no significant Russian gold or platinum stockpiles).
  • In the Equatorial Resources presentation that was made to the Sydney Mining Club on 1 March 2012, an ambitious quote was given by Wu Xichun of the China Iron & Steel Association that "By 2015, China wants to import 50% of its iron ore from Chinese owned mines elsewhere in the world".

Nov 2012 - China Visit

  • Key Points
  • China expects to have ~8%pa GDP growth for at least the next 10 years.
  • From what we saw and where we went, China appeared to be booming in construction. However, it also appears that China does not want to pay high commodity prices to achieve its growth and may hence dampen expectations.
  • Main Statements by Chinese Presenters at the 2012 China Mining Conference :
  • The commodity prices are high due to our (China's) demand, why should we (China) have to pay high commodity prices for our own demand?
  • We (China) have so far been given two gifts to acquire resources cheaply, namely the GFC in 2008, and the current Euro crisis.
  • No additional big infrastructure capex/stimulus injection is required, because it is not as dramatic as the 2008 & 2009 situation, annual infrastructure development is already occurring and the cpi (inflation rate) has been declining.
  • The growth rate of ~7.5%pa to ~8%pa is expected to be achieved by the movement of 400mn to 500mn people from rural to urban areas in the next 10 years, with income per capita rising from the current 7,000Rmbpa per rural person & 21,000Rmbpa per urban person (expected to at least double in the next 7 years), and them then increasing consumption (both urban and rural in for example electrical and home appliances, medical, social, education),  USA is ~75% consumption / 12% investment vs China ~38% consumption / ~ >55% investment - and is slowly changing .
  • Iron ore prices were expected to be weak in 2013 due to weak European demand an'd the US fiscal cliff (CRU disagreed with this view, because they thought Europe was gradually turning upwards, and the US had bottomed in the 3rd Qtr 2012).
  • Iron ore demand was expected to continue increasing to possibly 1.5bt in 2015, with imports peaking at ~700mt except that China expected to be supplying ~60% of its iron ore from its mines (~400mt in China) & overseas, with China's own mine component rising (as its African mines are commissioned) during 2015 to 2020, sourcing less from Australia and Brazil.
  • For commodities : prices were seen to be flat in 2013 with steady demand for copper, nickel, aluminium, zinc, gold at $1700/oz and silver, due to a flat to weak Europe, and slowing India. However, steel demand was somehow seen to increase with no commodity price impact and uranium prices were expected to one day recover to the long-term contract price of $65/lb.
  • Main Observations :
  • China's GDP growth rate appears to be a case of "pick a figure" as it is an average across the country, with some parts of China significantly higher than others, e.g. the highest in 2011 appears to have been Chongqing 16.5% [collective pop: 33mn],  Tianjin @ 16%; Sichuan (includes Chengdu [pop:15mn]), Guizhou and Yunnan @ 15%; and then Shandong & Zhejiang @ 14%.
  • China's GDP increased from $1.45trn in 2002, to $7.32trn in 2011 (with a target of 28% of world GDP in 2030), while the world's GDP apparently incrd from $43trn to $69trn, Tianjin incrd from $26bn to $175bn in 2011, with Shandong's GDP at ~$650bn & Zhejiang's GDP ~$500bn.
  • Tianjin, Chengdu and Chongqing were a case of construction, construction, construction with crane farms, metros and bullet trains. The older apartments are gradually being replaced with 20 to 28 storey blocks with a study showing that it is more environmentally efficient to have 20 to 28 storey blocks (although there are also some areas of blocks of 2 storey houses).
  • Chengdu has 4 metro lines under construction / extension, as does Beijing, Chongqing, & Tianjin.
  • Bullet train lines are criss-crossing the country, and duplicate ring roads have started construction such as the tier above the second ring road in Chengdu.
  • Chongqing also has at least 5 (that we saw) bridges under construction over its rivers and valleys.
  • The market appears to be overlooking Brazil (which has an FDI of half of China's at ~$60bnpa).

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