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Tagged with: China

Jan 2006 - Year End & China

  • The main potential restriction to China’s growth appears to be insufficient raw materials in the world (based on what I could see). China is currently in 10-year Growth Phase 1 to 2010, when it is expected to accelerate into Phase 2 to 2020 (based on a presentation at China Mining 2004).
  • The top 3 performers by company have been Independence (IGO) up 2,364%, followed by Kingsgate at 1,573% and then Consolidated Minerals up 906% (based on share price appreciations since ERA’s first report less dividends).
  • I remain amazed that there is still a view that “the sky is going to fall” or “this cannot be a super-cycle” or “commodity prices have to fall if not in 2006, then definately in 2007 and if not in 2007, then it has to be 2008”, or “commodity prices are overdue for a correction because they should have turned down at the end of 2004 according to the historic world IP growth curve” or “China has to grind to a halt due to fundamental economic theory” – to anyone who makes these remarks you should ask “when was the last time you visited China ?”. Quite often the replies are either : “never; a long time ago; or I don’t need to go there because it is obvious what has to happen.” To those that haven’t gone, do yourself a favour, take a week off and go (Singapore Airlines return from Sydney is about A$1200) and make your own opinion based on first hand observations, otherwise much greater monies can easily be lost through taking the wrong stance.
  • It has been commented that nickel prices must fall because the nickel laterites have to be developed in order to meet demand, with a new nickel laterite mine required every year to meet demand expectations. But each 40,000tpa to 50,000tpa nickel laterite mine costs at least US$2bn to construct over 3 years or so, and then take up to 8 years to reach full capacity and require maintenance and sustaining capex of US$100m per year. That level of capex requires minimum levels of nickel prices to be viable, and Minara are still not quoting their cash costs.
  • This belief that commodity prices have to fall is the only rationale I can apply to the relatively weak performance of Australian nickel producers such as Mincor and Sally Malay during 2005 as shown in Table 1, which we believe are both capable of exceeding A$1 per share, with Independence capable of being well over $2 per share (a 70% appreciation on $1.18 = A$2.01). Both Consolidated Minerals (CSM) and Titan Resources (TIR) also do not appear to yet be receiving any consideration for their potential nickel production, but that could change over the coming year to December 2006.

Jan 2007 - Year End & China

  • The construction pace of growth in China appears to be accelerating and is involving bridge building engineering feats and extensive spending on railways & rail networks with US$190bn allocated up to 2010 and more to 2020.
  • It didn’t matter where you went in China, literally everywhere was in major construction in villages, towns, cities, plus new railways & new freeways etc.
  • The main base metal of interest still appears to be nickel (based on INCO and Falconbridge both taken over, & Jinchuan’s offtakes with a number of ASX listeds).
  • I re-iterate a comment I made in our last annual review dated 3 January 2006, namely to anyone that still insists that “commodity prices have to fall”, or “China’s growth has to come to an end”...you should ask them “when was the last time you visited China?”.
  • This comment is based on ERA’s (my) last visit to the China Mining (November) 2006 Conference in Beijing, in which I visiting Golden Tiger’s operations in Western Guangxi and SGX’s Jinfeng operations in Southern Guizhou during the week before the conference, attended the conference and saw a number of blue skies over Beijing including an almost clear sky flight from Guiyang to Beijing, and then visited Shanghai and some friends studying Mandarin at a university in Hangzhou.
  • The disparity that we wrote about in the performance of Australian nickel companies during 2005 and our comment that “we believe both (Mincor and Sally Malay) are capable of exceeding A$1 per share, with Independence capable of being well over $2 per share”, was an understatement as during 2006, both MCR and SMY exceeded and are still more than $2/share, with Independence rising to over $5/share, before dropping back.
  • Both Inco and Falconbridge have been taken over, so comparisons with them cannot be made any more – surprisingly no one has focused on why they were taken over as in why not aluminium, copper or zinc companies. However, Table 1 below reflects a “what if” nickel stayed at US$15/lb (US$33,000/t) since current share prices appear to be indicative of nickel prices of ~US$

Jan 2008 - Year End & China

  • 2008 appears to be heading for a year of M & A activity, especially of the junior Australian metal producers, with possible premiums of 35% to 40% being paid.
  • The nickel sulphide producers could be prominent in the activity, and our conceptual order of value is Albidon, Sally Malay, Mincor & then Independence
  • While China would love to have lower metal prices, the developing countries are in synchronised growth mode. One of the metals to watch may be Cobalt (now ~US$45/lb) which could focus the market on ALB, SMY, MRE and VCN.
  • This comment is based on ERA’s (my) last visit to the China Mining (November) 2007 Conference in Beijing, in which I visiting Golden Tiger’s operations in Guangxi during the week before the conference, attended the conference and saw a number of blue skies over Beijing (after winds had blown away the smoke from burning-off the rice fields). It was actually even possibly to see the distant mountains (~50km away) at the end of some of the streets.
  • China realises what its metal requirements are and hence would love to have lower metal prices, by any means possible (even if it means taking over [or a blocking stake in] RIO by a consortium of companies). The mid-2008 stainless steel sabre-rattling can only be done so many times before the market becomes immune to it. It was commented at the conference that this is the first time that the developing countries are in synchronised growth mode, following in China’s footsteps. The US was expected to stumble and possibly still have a psychological impact on the market, but the reality was that it appeared unlikely to reduce the pace of world growth by more than 0.5%.
  • So, following on from INCO and Falconbridge, LionOre has gone (to Norilsk), Xstrata has acquired ~43% of Jubilee, and in a pincer movement Zinifex has offered $1/share for Allegiance (AGM). AGM closed at A$1.07 on 31 December 2007, inferring that the market is looking for more. At the recent China Mining Conference, AGM stated that it now had 3 stopes on line, was looking at possibly a 50% expansion, had a number of regional exploration targets, was on-track for MQ08 production, and had some higher grade nickel sulphide ore as shown in the presentation.

Feb 2009 - Year End & China

  • Well it was a nice rally over the Christmas/New Year period, it seems hard to believe that Albidon quadrupled to 32c or Panoramic touched $1.42/share, along with many other price rises, before the doom and gloom settled back in, on plenty of negative media releases.
  • Perhaps we should change the western world years to conform to the Chinese ones, after all China has basically been on holiday up until now. The Year of the Ox started on 26 Jan 2009, and China was still on holiday for the week after that. Since China has such a significant impact on world metals’ demand and even if it is only 7% GDP growth on 2008, it is still growth (and in fact about 3 or 4 years’ ago, 7%pa was in fact the target). [Of course, the actual growth rate may still be up to 1.5% higher than an official stated 7% growth rate].
  • We have actually seen a number of positive releases relating to China, along the lines of metal restocking immediately ahead of Chinese New Year, rising spot iron ore prices (its almost doubled from the US$40/t lows of early Nov 08 to about US$75 to US$80/t), Jinchuan forecasting an increase to 125,000t of nickel production (from ~ 110,000t) in 2009, etc. – but virtually none of that appears to have been reported in the Australian press.
  • We possibly were too optimistic with our scenario expectation of the early stages of a commodity market recovery occurring in March/April 2009 (probably led by nickel), but it is still very early in the 2009 year to push that recovery expectation out to 2010, especially as China has not really started yet.
  • At the China Mining Conference in Beijing in November 2008, we attended the commodity sessions, for which the general main points were that;
  • China needs the grade and the orebodies. It is not really bothered about the next 3 years, more how to fill in the growth demand gap from years 20 to 40, and hence wants to control orebodies outside of China to achieve that goal (either by funding companies or controlling them – acquisitions to be done at bargained prices).
  • It also thought that it was criminal to hold countries to ransom (like BHP and RIO) on the iron ore prices, companies can make reasonable profits, not excessive profits.

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.

Jan 2011 - China Stopping?

China is Not Going to Stop...

We have said it before and are repeating it here again, namely China is not going to stop. We made our annual visit to the China Mining Conference that was held last year (in November 2010) in Tainjin. We have visited the conference every year since 2004, and seen them gradually evolve to hosting over 3000 delegates.

Feb 2011 - Year End & China

  • Reading our introduction to last years’ comment dated 29 January 2010, little appears to have changed one year later, apart from the fall in share prices occurring earlier in January 2011, viz :
  • “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?”
  • In November 2010, after visiting Gryphon’s prospects in Mauritania and Burkina Faso we flew to the China Mining conference in Tianjin, and then saw some friends in Kunming (to get a greater feel for what is going on in China). After all, China is still the engine of growth for the commodity sector.
  • At China Mining, sessions are held covering the different commodities. Originally rare earths were planned to be covered, but then dropped and coal was excluded too. Perhaps China thinks it has or thought it had enough under control (which in the case of coking coal, it may have done as this was well before the QLD floods of January 2011).
  • Although China is trying to find ways of reducing the costs of various ores (possibly it will acquire its own shipping fleet), it felt that due to supply/demand gaps and hence shortages, the pricing pressures remained as scrap quantities reduce and India possibly reduces its exports (for its own domestic consumption) especially for copper (due to the emerging ETFs), and iron ore/steel due to the 3 majors (BHP, RIO & CVRD).
  • What was noticeable this year was the size of the booths at the conference and even Jinchuan manufacturing its own mining equipment as shown in Figure 1a. There is now a significant choice of mining equipment manufactured in China. China is also building self sufficient Circular Economic Parks centred on producing mines such as either coal or oil (there were nodding donkeys on the hills of the model) as shown schematically in Figure 1b. Datong (coal) has already built an operating one.
  • It was stated that China invested $301bn (2trn Yuan) during the 11th 5-year plan (2006 to 2010) to save energy and reduce emissions (hence the sudden slowdown at the end of 2010 in order for companies to try and meet their expected targets). In the 11th plan, more than 70% of coal-fired power stations installed the flue gas desulphurization (FGD) system. Greater reductions and energy savings targets are planned to occur in the current 12th 5-year plan from 2011 to 2015.

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".

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