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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.

Each year we try to visit the conference area and some part of central China to assess the ongoing progress and the potential continued influence of China on commodity prices. Originally we visited gold mines or exploration prospects when they were partly owned by Australian companies (from October 2003), and have physically seen and experienced the growth in China’s infrastructure.

China has a vision of where it is going to be in 20 years’ time. That vision has been costed to the last cent (or jiao, where 100jiao = 1Rmb, or 1Yuan, or 1 Kwai, and 6Rmb approximately equals 1A$), depending on metal prices, of which China would like to pay the lowest price possible to achieve its goals.

The concentrates purchased overseas ideally through joint ventures or ownership are blended in with China’s own mostly low grade ores (the higher grades having being mostly gradually depleted over time). At this stage a high proportion of the ores and concentrates are coming from Australia, however, new discoveries continue to be made in China, while China is trying to get lower prices from wherever it can, be it Africa, South America, Indonesia, the stans or even anywhere that is considered by other companies and countries to be politically risky/difficult.

In 2009 when we caught a bullet train from Tianjin to Beijing, there was a choice of about 4 trains per day. This year, they leave every 10 to 20 minutes, are full and second class cost ~58Rmb ( or <A$10, first class costs 11Rmb more), for the ~120km, 30 minute long non-stop journey at up to 320km/hour to Beijing.

In November 2010, the new bullet train high speed railway line 1318km long link between Beijing and Shanghai was completed, with the peripheral works now under construction for opening in 2011. The expectation is that the train journey will take possibly <4hours (down from the current ~10hours). The plan is for a journey from Beijing city to Beijing airport, fly to Shanghai and connect to Shanghai city to take as long as the train journey.

The 1318km railway line has so far cost ~A$33bn and involved ~135,000 workers from mid-April 2008 to mid-November 2010 (19 months), and is already partly open as the section to Tianjin station is the first of the 24 stops via Jinan and Nanjing to Shanghai. It has been estimated that the Beijing to Shanghai link should be able to transport 80 million passengers per year (in one direction).

Two new high speed railway lines were opened in 2010, being the 1068km long Wuhan to Guangzhou and 505km Xi’an to Zhengzhou. China now has 7,430km of high speed rail and expects that to increase to 13,000km by 2012. By then, passengers are expected to be able to reach Beijing by most provincial cities within 8 hours by train.

The highest bullet train speed China has so far achieved is ~417km/hour (on the Shanghai – Hangzhou railway on 28 September 2010), so it will be interesting to see just how fast the Beijing – Shanghai bullet train express can attain.

China envisages linking its bullet trains regionally to at least 17 countries by 2025. It plans to have 3 high speed railway lines, firstly from Urumqi (in Xinjiang Province) through Central Asia (Kazakhstan, Uzbekistan, Turkmenistan, Iran, Turkey) and ending in Germany, secondly SE Asia being Kunming, via Vietnam, Cambodia, Thailand and ending in Singapore, and thirdly Russia from Heilongjiang across northern Russia to Western Europe. There are also considerations linking India and Pakistan.

China is also exporting its high speed rail knowledge, working in the US and South America, such as the planned Rio de Janeiro - Sao Paulo - Campinas 510km link due for completion by the 2016 Olympics in Brazil, and the apparently 1250km long link from San Francisco to Los Angeles via San Diego.

Yes food inflation is an issue, a bowl of beef noodles at a roadside stall in Kunming costs 4Rmb (about 65Ac), which is ~30% higher than it was two years ago at 3Rmb in Nanning (unless you want lamb – that’s cheaper, it currently only costs 3Rmb / bowl). Travel in Kunming by bus costs 1Rmb between stops (it’s cheaper if you have a bus pass) – that’s anywhere between stops. I travelled ~8km from one side of the city to partly across the other side at a cost of 1Rmb (16Ac).

And yes the DVD’s and CD’s still cost up to 10Rmb from main street shops.

Travel underground in Beijing is still 2 or 3Rmb between stops, which is higher than it used to be in 2004 at 1 or 2Rmb – but then the 3 underground lines have since become 10, fully modernised, with T-cards and with 2 or 3 new lines currently under construction.

New undergrounds are under construction across China. We have initially seen them being constructed in Hangzhou and Guiyang. The announced intention at China Mining in 2009 was to have them in every city with a population greater than 3million. That resulted in costing too much, so now initially it’s for any Chinese city with a population greater than 7 million.

Consequently, one line was opened in Chengdu in November 2010, and we saw new undergrounds/metros under construction in Tianjin and one in Kunming. The first line in Kunming is broadly north-south passing from the new university campus being constructed / partly opened apparently ~15 to 20km SW of the city, past the airport (as shown in Figure 1) and through to the other side of Kunming – scheduled for opening ~November 2011 or early 2012. The initial lines seem to be broadly N/S and E/W in the relevant cities.

The point to recognise about China is that just because construction appears to have slowed down where you are, doesn’t mean that the country has slowed down – it’s simply happening elsewhere. Beijing was mainly reconstructed ahead of the Olympics in 2008, Shanghai was mostly

reconstructed ahead of Expo in 2010, so Beijing and Shanghai are not necessarily representative of the current construction in China.

On the flight into Tianjin we counted ~15 crane farm blocks (blocks of apartments) under construction. On the bus journey across Kunming we counted ~8 crane farm blocks, averaging less than 1 per km, and that excludes all the other construction taking place.

On the train journey from Tianjin to Beijing we saw villages that had literally be sliced in half (as if someone had drawn a line on a piece of paper) and one side levelled for construction, presumably to be followed post construction, by the other half.

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).

In Iron Ore, China expected to increase domestic production except that their grades continue to fall (currently thought to average ~20%Fe, with the lowest being mined at possibly ~12%Fe), requiring blending with higher foreign grades to achieve the higher quality steels. There is an exploration push / move to acquire orebodies offshore outside of the influence of the 3 majors. China ideally needs to own the overseas orebodies so that it can achieve/receive lower prices for the ores.

Copper was perceived as remaining undersupplied until at least 2025, with an average demand growth rate of 3.4%pa for the next decade depending on India, otherwise it could be closer to ~3.9%pa. Ways to reduce costs were seen as changing the smelting techniques which would have the added benefit of potentially reducing power consumption.

Demand for copper was perceived to remain high due to the new uses (especially battery-powered / electric vehicles) and China’s likelihood of continuing its use in construction (tried and tested as lasting almost forever, compared to any newer alternatives). The ETFs were expected to reduce liquidity, though it was regarded as debateable as to how ETFs are going to be treated when it comes to “LME” stockpiles.

Lead and zinc were seeing as being influenced by the e-bike and e-car revolution with batteries still required especially lead, although lead recycling is high at 33% compared to zinc at only 3.5%. Automobile demand was expected to

remain high with expressways and rail construction fanning the demand flames. In October 2010, annual vehicle sales increased to 1.5m units (1.1m of which were passenger vehicles), raising the seasonally adjusted annual rate to 19.9m units per year.

Nickel was seen as dependent on the success of the new nickel laterite plants and the allowed production from nickel pig-iron. So far, the only new nickel HPAL laterite plant in continuous operation is Minara’s, Ramu is stuck on its plan to discharge tailings into the sea, Ambatovy has pumping issues with its 250km long pipe-line between parts of the plant, Goro blew up its acid plant and is on hold to mid-2011, Ravensthorpe is an unknown, and Koniambo is ~90% complete as far as construction is concerned.

Given the above track record for HPAL there is no rush to spend ~$4bn to $5bn on a new HPAL plant. Nickel pig-iron is a significant influence, but it has the drawbacks of highest power consumption and environmental by-product damage. There is also a return to the higher quality nickel steels, with the move to the 200 series not as successful as providing the satisfaction that comes with 300 steels (requires higher grade / quality).

China has a very ambitious program when it comes to uranium for power stations, with many under construction. Construction of another 650MW reactor in Hainan Province was announced on 22 November 2010 that was expected to be operational in 2015. Although China does produce some uranium domestically, together with offshore production, it expects to be able to account for at least 50% of its needs by 2020 being an increase from 5000tpa to 10,000tpa compared to potential use of 20,000tpa. Currently 3000tpa is being used for its 11gW of nuclear capacity (being ~1% of total power capacity), but power stations take time to construct and commission.

And lastly, Gold. The panel gave an expected range of US$1200/oz to US$1500/oz for the gold price in November 2011. China Gold has experienced significant demand and now has a growing large number of retail shops in airports, shopping malls etc throughout China.

China has stated that its ideal target sustainable growth rate is 8%pa.......for the next 20 years. Periodically it will understandably try and slow down, to get towards that rate, after all it apparently achieved a peak rate of ~14% at one stage in 2010.

However, it should be recognised that such slowdowns are simply an attempt to control the pace of the growth rate. China’s growth rate is like an automatic car being driven with one foot on the accelerator and periodically slowed down by touching the brakes.

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 an Authorised 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 New Underground Line under Construction in KunmingGDNjan2011

  • Written by: Keith Goode
  • Saturday, 01 January 2011