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Jan 2010 - Year End & China

  • I must admit that even after all this time, the recent falls (mid/late January 2010) in share prices and commodities on the basis of a China slowdown still comes as a surprise – as if China could suddenly grind to a halt. The market has yet to accept that China has a planned vision of where it wants to be and how it is going to get there for the next 20 years. The main beneficiary should be Australia because of its proximity and relatively high grade orebodies. We re-iterate what we have said before, if anyone gives a China view, ask them when was the last time they were there?
  • The market’s behaviour implies that the share prices are going down because China is slowing, but commodity prices appear to be ignoring LME stockpiles & the major producers are struggling to expand as fast as possible to meet demand that has pushed spot prices of iron ore and coal well above their benchmarks. In September 2009, the brokers were forecasting gold to fall and drop to ~US$900/oz in 2010, whereas instead it rose to ~US$1300/oz on physical (an increasingly wealthy growing middle class in China, plus India and the central banks), and currency demand.
  • As it turns out, the 9.5% expected increase in China’s GDP for 2009 (at the time of the China Mining Conference in Tianjin TEDA in October 2009) was in fact ~10.7% (according to the latest statistics [21 Jan 2010]). In fact the last quarter of 2009 may have been at the blisteringly unsustainable pace of 13%pa (the official figure for the first half of 2009 was 7.1%). So it is no surprise that credit is being reined back, to an expected 7.5trnRMB (US$1.1trn at 6.8RMB to 1US$) compared to 2009’s 9.6trnRMB (US$1.4trn). Has the market already forgotten that in early April 2009 it looked like China was heading for a growth rate of < 6% compared to the long-term target rate of 7%pa to 8%pa?
  • April 2009 was actually the turn, when a number of construction sites in a number of cities in China moved to double-shifting and almost overnight, there was an immediate shortage of copper wire and copper piping. [Note : as per our comment last year, China only produces ~15% to 20% of its annual copper requirements, or 0.9mt with 4.5mt imported in 2008]. ERA business wise, we restarted marketing at the Paydirt Gold Conference at the beginning of April and by the end of April 2009, our forward book was back to normal (ie booked about 1 year ahead, [it had been booked up to 2.5years’ ahead], when the crunch hit we lost everything from Sept08 to Dec08 & other spots).
  • We (ERA) did in fact state on ABC TV [7.30 Report on 12 Dec 2008] that we expected the turn to be about Mar/Apr 2009 (while some thought 2nd half 2009 was a possibility, most appeared to be expecting 2010 or 2011). Our estimate was made on the basis of China slowing down ~6 months ahead of the August 2008 Beijing Olympics and then at least 6 months to recover afterwards, allowing for Chinese New Year and China’s new regulations on emissions), whereas timing wise, kick-starting China’s economy appears to have been the main reason for the recovery.
  • Written by: Keith Goode
  • Friday, 29 January 2010

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