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Dec 2013 - Supercycle

The Supercycle is not over yet !

Or at least that was the comment made by at least 3 of the Chinese presenters in the commodity sessions spread over 4 days of the China Mining 2013 Conference held in Tianjin in early November 2013.

  • The general view of the mostly Chinese presenters at the conference was that base metals were expected to remain weak during 2014, due to a slowly recovering US, with a still very weak Europe, and would recover in 2015 as Europe recovers. This view seems to conform generally with that of the market, however, it does not appear to agree with what appears to be actually going on in China, or even perhaps Europe.
  • This year I took the usual Sydney return flight on Cathay Pacific via Hong Kong to Beijing, the return bullet train Beijing/Tianjin trip (30min/130km/max 322kph), and a return bullet train Beijing/Xian trip (4h40m to 5h30m/1216km/max 306kph [the shorter time includes 1 stop, whereas the longer time includes 8 other stops] - the bullet train is more direct than the normal train's ~14hrs/1283km journey).
  • Along the bullet train routes, and in Beijing, Tianjin and Xian, I observed what appeared to be accelerated, almost frantic construction of buildings, bullet train tracks and metro/underground lines.
  • Tianjin's GDP was 16.1% in 2012 and was expected to be about the same in 2013, and there was still plenty of residential and major building construction in progress to support that, with the old 4-storey apartment blocks being gradually demolished and replaced by >28-storey apartment blocks or specialised apartment/housing areas many in the historic French/Italian classical styles.
  • Some of these new buildings already have a plaque in front of them stating that they are to be preserved for being of historical / architectural importance (which they gradually could be). Wuqing, which is a stop on the Beijing to Tianjin line  and has been constructed over the past few years, now (according to China Daily's 14 Nov issue) has a Venice style "Florentia" village/town  complete with gondolas, drawbridges and spouting fountains in its Italian-styled central plaza, with at least 200 brand-name shops including Burberry, Prada etc.
  • After a couple of years of virtually no construction in the vicinity of Guomao (in the Chaoyang District of central Beijing), there are 4 or 5 major buildings under construction, including Stage/Phase 3B at the back of the China World trade centre, and the new Keppel, Soho and Emperor Buildings as shown in Figure 1. Figure 1 also shows clear blue skies over Beijing which occurred for a few days despite the efforts of factories still in the city, spewing out their various products from chimney stacks.
  • On the bullet train route to Xian, it was almost a case of each stop being or becoming a new city with crane farms (a crane farm or CF being a clump of 5 or 10 cranes simultaneously building at least 5 apartment blocks at the same time -  sometimes 10 or 20 apartment blocks are constructed at the same time).
  • While most of the cities (which I had not heard of) had 3 to 5 CFs under construction, Zhengzhou which lies at the intersection of N/S and E/W bullet train lines had ~ 12 CFs (as viewed just on the western side of the train) under construction. Zhengzhou also had 4 new bullet train lines under construction peeling off to the east, plus a freeway full of bullet-train rail "linking-tops" (that bridge between the supports - see page 9 of Paydirt's August 2013 issue of this column).
  • The next stop was Luoyang (which I have never heard of, but saw in a museum in Hong Kong that it was once the capital of the Han dynasty), and another ~10 CFs.
  • In Xian, I travelled on a number of roads (including to the Terracotta warriors) and hence saw more of the city and >20CFs in various states of construction plus at least another 6 major construction blocks (for hotels, malls etc - ie well more than Tianjin). A building in central Xian (near the South gate) was displaying apartments in complexes for sale on a mega-screen at various floor sizes (eg 80 to 171 sqm), and scrolling through at least 8 apartment complexes.
  • Xian opened its second metro line (both are being extended) in December 2012, so it now has two jam-packed metro lines, and 4 more under construction - plus possibly another as there were metro train posters at nearby Lintong (a hot spring town [/ small city?] on the way NE to the "warriors" and another ~5 CFs). There was also extensive excavation at the South gate of the inner walled city.
  • On the return bullet-train trip from Xian to Beijing, I counted the number of bullet trains (typically 5 to 15 carriages long) passing in the opposite direction. In the almost 5 hour journey there were exactly 20. Somewhat disconcertingly, the trains were sometimes only 3 to 5 mins apart (but at 300kph, 5km only takes 1 minute, ie 5mins is 25km). And between each carriage just looks like an immovable corridor (even at 300kph). Each train has its own dedicated trip, as in travelling to Xian did not involve changing trains despite swapping from a N/S to an E/W direction at Zhengzhou East's station.
  • As was mentioned in the Sydney RIU conference in May 2013 by a Chinese based presenter, "why do you (the west) get hung up over China's GDP numbers, 7.5% just means somewhere between 7% and 8%". As was remarked to me in Hong Kong, "they are just rounded guideline numbers based on averages". As I have remarked in previous columns during 2013, one factor not included in China's GDP is the mega-$bn construction JVs being undertaken between China and the rest of the world (especially Africa).
  • There has been a lot of market focus and speculation on China slowing down from infrastructure to domestic consumption, without recognising that the transition period between the two could last 2  or 3 years, or longer and may only gradually apply (or not) to all the parts of the country.
  • On the flight from Hong Kong to Beijing, I sat next to an economist with an European bank who remarked that his bank's view was that Europe was expected to be weak during 2014, especially when compared to a recovering US. However, he thought that Europe was recovering faster and consequently he was investing in European bank stocks.
  • This perception of a faster recovering Europe was later echoed when I was in Hong Kong, and a private equity firm remarked that they had recently invested in something in Europe following signs of a turnaround/bottoming. Other funds in Hong Kong commented that there have been earlier than anticipated signs of a recovery in Europe and recently reported higher than expected figures from the UK.
  • Even Ireland stated that it expected to be able to raise its own money in January/February 2014 (following the €67.5bn bailout in 2010), and Spain only used €40bn of its €100bn bailout allocation.
  • It may be that Europe's recovery is more like 2H2014 than 1H2015, with a steady lead up in 1H2014.
  • At the Conference, it was stated that although China has apparently been responsible for ~55% of the resource acquisitions in the world to date (2012 ?), it still needs to make a number of resource acquisitions if it is to meet its long-term growth targets.
  • It was thought that 2014 would be the year of private equity groups both locally (China) and offshore combining to acquire projects, or the majors entering into JV's to develop resource projects that were being cast aside as too costly, and reduce the risk, such as has been seen between Chinalco and Rio. This view was also given in the subsequent 18th Central Committee's 3rd Plenary Session.
  • Chinalco has in fact entered into a major iron ore project being the proposed $18bn Simandou JV with Rio in Guinea that is scheduled to begin production in December 2018 (producing ~40mt in its first year [2019] and ramping up to a ~100mtpa from 2023 to 2034, and then dropping back to 60mtpa); and its $4bn Toromocho copper project in Peru that is scheduled to commence in December 2013 and produce ~250ktpa of copper.
  • It is possible that China has seen that the window for acquiring resource projects cheaply could be gradually closing and consequently are "speaking their own book" or trying to dampen down expectations of rising commodity prices which are being experienced, such as spot iron ore prices in early November 2013 of over $140/t (whereas many brokers/banks were forecasting them to be lower - compared even at Diggers in August 2013, to comments from the iron ore producers [BCI, FMG, AGO and MGX] being one of demand).
  • The Conference expectation for the bulks, was that due to the stated expected increase in urbanisation from the current 52% to possibly 57% in 2020, steel consumption was expected to increase to peak at 820mtpa, with iron ore consumption reducing as the more efficient, new electric arc furnaces replace the older furnaces. In 2012 steel production was ~720mt and was expected to be ~780mt in 2013.
  • Given that some of China's peers have 75% urbanisation and higher steel ownership per capita than China, demand could be higher. The knock on effect is that imports of iron ore were expected to be higher at ~800mt in 2013.
  • There are a number of new iron ore projects coming into production (totalling at least 750mtpa (mostly in Australia and South America) by 2020, without factoring in the potential China/Africa JVs, and it was hoped (by China) that this would dampen price expectations. Although any reduction in demand was expected to probably be offset once India began to increase its demand. Labrador has also starting to deliver iron ore to China, however, its average costs were reported as high at $120/t, compared to Labrador's DSO at $50/t.
  • In coal, a comment was made that coal imports were expected to increase in the short-term, however, Datong (a major domestic coal producer) had a target of commissioning 11 x 10mtpa, 5 x 5mtpa & 12 x 3mtpa coal mines in its 12th 5 yr plan, switching from smaller tonnage to larger tonnage mines.
  • Datong had two 10mtpa circular mines in operation and 4 more 10mtpa mines were in construction (a circular mine generates its own power/electricity and produces saleable building material and chemical by-products from its waste). Datong estimated that selling the by-products increases its profit from 98 yuan (~A$20)/t to 111yuan (~A$22)/t of coal.
  • Datong commented that they had converted an old coal mine area into a green tourist national park by spending $92m (460m yuan - there are Govt incentives) which received ~120,000 visitors in the past year to September 2013. Old slumped mining land was also being reclaimed by infilling with river sand and returning such areas to farming for crops etc. Datong also has installed 1000MW of wind-turbine power and expected to install 1000MW of solar power by 2020.
  • There were a number of detailed presentations on China's shale gas possibilities, however, the locations appear to be in steeper, faulted terrain with relatively little infrastructure compared to what has been happening in the US, which already had an established network delineated over the past 30 years. Currently ~25% of China's oil requirements come from Africa.
  • In the base metals: China continues to dominate copper consumption at almost 9mtpa compared to the 20.4mt produced in 2012 (according to MLR estimates, with the next highest consuming country at ~1.8mtpa). China expected to increase its copper consumption by ~0.5mt from new demand products such as in subways, anti-bacterial units, air-conditioners etc. China needs to acquire as much copper resources as it can, because it only produces about 1/6th of its requirements domestically.
  • Nickel demand was expected to remain relatively high due to stainless steel requirements, although supplies of nickel pig iron are continuing to increase from the Philippines and Indonesia. Although the nickel laterites (besides nickel pig iron) continue to be the wild card against nickel prices, CRU had nickel as one of their "hot " 2017 commodities, along with tin, uranium, platinum & palladium, coking coal, aluminium, oil etc. CRU were negative (for 2017) on copper, gold, silver and iron ore.
  • Demand for the pges or mostly platinum, palladium and to some degree rhodium, were based on China increasingly focusing on ways to reduce pollution in its cities. Impacts have already been noticed by reducing the number of cars on the road (eg odd numbered plates one day, even the next - as was used in Beijing before and during the olympics), and there are many vehicles without autocatalytic converters. At the same time, South Africa has been applying water reductions to a number of its platinum mining operations, further reducing supply and pressurising pge prices.
  • Most Chinese gold producing companies were negative on gold forecasting a range of $1200 to $1400/oz or possibly $1500/oz for the next few years, citing ETF sales and the strength of the US$ as dampening expectations, although a Chinese economist thought that under the new economic theories based on printing paper currencies, gold may appreciate (as a separate asset class) along with the US$.
  • However, gold aside, Minco Mining thought that silver could change its relationship with gold because they were very bullish on silver, targeting prices of ~$35/oz from ~2014, based on industrial demand which has increased from 30% in 2000 to 46% in 2011 and continues to steadily increase due to solar power demand. Solar power panelling apparently requires ~80t of silver per 1GW of electricity.
  • With China apparently producing 13GW of electricity from solar panels in 2011, and examining its solar power targets (ranging from 5.5GW to 35GW higher) by 2020, silver could be faced with significant demand.
  • But there are other possible "green or renewable" power sources, namely uranium. At the conference, 3 separate presentations focused on the potential aspects and demand for uranium. Although, no new construction of uranium power plants were expected to be approved in China until 2016, numerous Chinese joint ventures are taking place with construction occurring in various parts throughout the world, including the US, Europe and the UK.
  • In China, the main demand (and search for alternative ore sources) still appears to be for iron ore and copper resources, as China's domestic iron ore resource grades are low at ~20%Fe, and apparently relatively high cost; while its domestic production of copper is still only ~15% of its requirements.
  • Africa should gradually produce ore supplies, but is expected to be slowed by its infrastructure requirements and may be hampered by internal politics.
  • onsequently, the dominant supply "window" from Australia etc may only last for ~5 years or so. Although, Australia should still score from its relatively high grade products and  proximal location in SE Asia.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

 Figure 1. Construction around Guomao in Central BeijingGMJfig1supercycle-dec13

  • Written by: Keith Goode
  • Sunday, 01 December 2013

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