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Oct 2009 - What Slowdown?

Slowdown...what slowdown?

As one of the ~3000 delegates commented at the recent China Mining 2009 Conference held in Tianjin TEDA in October 2009, “it’s as if 2008 did not happen, China has just carried on from 2007”. An understandable comment having attended an extremely bullish second opening session in which China’s GDP was expected to increase to 9.5% in 2010, and the third quarter numbers to be released later this week (ending 23 October) were expected to beat analysts’ expectations.

As shown in Figure 1, somewhat appropriately, there was a crane farm behind the conference centre at TEDA (the new city of Tianjin, called the Tainjin Economic-Technological Development Area on reclaimed salt flats, that is actually south of Tanggu or ~50km east of the central original ~600 year old city of Tianjin).

Although TEDA was founded in 1984, its development began to accelerate from 1997, such that within just over 10 years by 2008, 4618 enterprises from 74 countries or regions had registered in TEDA with a cumulative investment of US$47.4bn. Of these, 157 current projects are funded by 76 of the 2008 Fortune 500 companies, some of which have been completed, that are to transform the vast area, mostly by the end of 2010. Vast as in 200sq km for the industrial area, ~10 sq km for the new port facilities, a Sino-Singapore eco city, and a No2 version of Shanghai, etc.

It was commented that the rest of the world had been caught up in the myth belief that China was reliant on the US for its consumption, whereas domestic consumption is ~US$1trn by itself (or about 1/3 of Europe). The comments that 20m had been laid off/unemployed were clearly vast exaggerations by the overseas media (possibly partly because a large amount is due to the annual university graduates entering the labour force).

The GFC had impacted on some of the coastal provinces that do export products to the US and Europe, but not to the degree hyped in the media.

The GFC has been seen as resulting in a series of positive changes for China, because there was no financial crisis in China, consumer savings in fact increased, and there were many commodity acquisition opportunities at low asset prices, especially in one of the main target markets, namely Australia.

The Chinese banks have had and still have open cheque books whereas presentations from the major European banks were still one of caution avoiding exploration and preferring “good” production growth for at least 3 years, although even then, still wary.

China was seen as the locomotive driving the world’s growth dragging the rest of the world in a number of unruly disorganised trucks behind it, but which could result in stronger world GDP growth of possibly 3.4% in 2010, as the global market continues its gradual recovery.

The major mining companies (without mentioning any names) were seen as being the main culprit that resulted in destroying so much wealth because of monopolistic control and the use of large stockpiles to try and drive prices up to unrealistic levels of profitability. Such monopolistic control was not expected to recur, the current price improvements being based on solid fundamental demand.

The stimulus package resulted in huge bank lending of 4trn RMB at the beginning of 2009. The GFC has had no impact on many of the internal cities of China such as Chengdu, Chongqing, Kunming etc with their growth still in the 9% to 10%pa region from domestic demand for housing, cars and infrastructure.

We did in fact spent a few days with friends in Kunming ahead of the China Mining conference and there are numerous crane farms scattered around the picturesque city, along with the fascinating construction of the second ring road in which 4 layers of road were being constructed at the same time.

Incidentally passing by bus through the central area of downtown Tianjin, it was a surprise to see layers of rail, as in a clump of ~20 railway lines, then a second layer (just like a major road intersection) of 2 to 4 lines, followed a block or so later by another clump of ~12 railway lines.

The most important markets for China were seen as copper, iron ore and steel, with a strong rebound having occurred as iron ore imports rose to ~65mt in September 2009 largely due to the expansion of the Chinese steel industry. Copper imports were up 65% to ~2mt in the first 6 months of 2009, and declined in July/Aug 2009, before resurging to almost 400kt in September 2009.

The main consumption for copper was seen as being in power lines and the power industry (50%?) and power consumption was up 10.2% in the last quarter, compared to a decline of ~10% in 4Q08. There has been a huge surge in auto construction, up 84% y-o-y, with an expected 13m sales this year, while housing construction has had a strong rebound too, with home sales up by more than 85% which has reduced housing inventories to less than 6 months, and encouraged new housing developments.

The growth in housing construction was expected to impact on steel and aluminium, and in turn on demand for coking coal, aluminium and bauxite.

Codelco gave a mega bullish scenario for copper consumption justifying its expense of US$12bn in expansions that were expected to ramp up in Chile during the next decade, as the copper markets continue to be pressured by falling copper grades (down 15% last year) and rising costs (being an industry average of US$1.30/lb last year). Copper supply apparently flattened last year, which has exacerbated the supply-demand gap. One of the main drivers to copper consumption was seen as being the various forms of renewable energy that require even higher levels of copper usage.

China was seen as being comparable to countries before the world industrial revolution, yet it already is expected to consume 1/3 of the world’s copper production this year (2009) and continue to increase its level of demand.

In the presentations there were number of references to the closure of small mines in a number of commodities such as copper and coal and the impact that has had. Due to such small coal mine closures in Shaanxi and Shanxi (which are two different provinces), China became a net importer of coal for the first time, with an increasing focus on both coking and thermal coal.

The demand for coking coal was expected to have increased by 60% in 2009 due to the new large furnaces in the east and coastal provinces and their demand for high quality, hard coking coal. The recent decrease in thermal coal was apparently due to high import prices and increasing domestic production in China. However, it was thermal coal is the still regarded as the main energy source in China and it was expected that demand for thermal coal imports would have increased by 69% to 60mt in 2009, rising further to 65mt in 2010.

It was commented that although Indonesia has reserves of 6.7bt and resources of 61.3bt, 34.7bt of the resources were <5100Kcal/kg, and Indonesia was stepping up thermal coal production to 280mt by 2015 of which 150mt was to be exported (mainly to Japan, South Korea, Taiwan and Hong Kong). However, China prefers its thermal coal to be >6100Kcal/kg and hence only im ported 11.5mt from Indonesia last year.

In fact 2009 has been a milestone year so far for China almost on a monthly basis having reached the age of 60 years (1949 to 2009), which is seen as being an auspicious age in which the benefits start to be reaped, because it is the completion of the first cycle of the 5 elements (metal, wood, water, fire and earth) and the 12 Chinese zodiac signs such as the Ox for 1949. May 2009 saw China have the 2nd largest stock market in the world, June become the second largest exporter, October the 60th Birthday and expectations of becoming the 2nd largest economy by the end of 2009 (pushing Japan into 3rd place).

It can be seen that China continues to move ahead, just because construction does not appear to be happening in one part of the country (because it has been semi-completed in that area) does not mean the country has ground to a halt, it simply means that it has moved on to another area.

However, China was still seen as having insufficient agreements over international resources to meet its required growth goals, and needed other countries to work with it as no country has all of its required resources. By 2020, the supply-demand shortage gap was forecast by China’s Science and Technology Ministry to result in foreign dependencies of 50% to 70% for oil, 57% for natural gas, 65% for copper, 50% for uranium, etc

It was stated that 3 factors were expected to continue to support current commodity prices, namely the weakness in the US$, the monetary expansion in the US as illustrated by the rising interest on US 10yr Treasury Notes inferring an increase in inflation, and the recovery of the PMI from its historic lows. The PMI being the purchasing manufacturing index, which has risen for the past 5 consecutive months in China.

The US$ was expected to remain weak for probably at least still the coming year due to the triple deficits (budget, national and trade) and the expectation that they have to print money as a way out of the crisis while maintaining low (fed funds) interest rates at the same time. One of the debatable questions raised was in fact that of what Australia is going to do if its currency continues to appreciate beyond parity against the US$.

As far as the sustainability of China’s growth, it is being sustained and is expected to be sustained for the far foreseeable future, any comments of a “bubble” were likened to the previous misleading myths that have been spread on China, compared to physical reality. The 15-year growth plan instigated in 2006 was still “on-track”. It was stated in one of the presentations that “Global mining is China and was expected to remain so for at least the next 25 years”.

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, and with his associates, may hold interests in some of the stocks mentioned in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

Figure 1. The Conference Centre for China Mining October 2009 in Tianjin, ChinaGDNoct09-1

Figure 2. The 3 factors supporting current commodity prices. Source : CITICS Tianjin Oct 09 PresnGDNoct09-2

Figure 3. The Third Copper Boom. Source : CITICS Tianjin Oct 09 PresnGDNoct09-3

  • Written by: Keith Goode
  • Thursday, 01 October 2009

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