In gold, China clearly "stuck its foot in the door" in September 2014 and caused the gold price to stabilise at about US$1220/oz, before removing its foot and seeing gold almost free fall in early November to ~US$1135 stabilise at ~$1140/oz and then on Friday 7 November power up through to an 8 Nov close in Hong Kong of almost $1180/oz. A ~$40/oz rise, which must be hurting that $1.5bn nanosecond short that smashed the gold price down by ~$20/oz from ~$1165/oz to ~$1145/oz on 4 Nov, unless it has already been closed out.

As for gold in the coming year (2015), the most recent forecast I have encountered was US$1100/oz to $1400/oz that was made by China Gold at the China Mining Conference in Tianjin in late October 2014. At that conference, the CGA (China  Gold Association) stated that they thought China's CB gold reserves were >5,000t, and confirmed that China's gold consumption in 2013 was ~2,199t, which is about double or over 1,000t or so more than the WGC had at ~1100t.

In doing so the CGA has exposed the flaw that has existed in the gold supply/demand table since it was started by the GFMS in the early 1970s, namely the investment balance "fudge factor". Or in other words, some supply and demand factors can be nailed down in detail, but within "the balance" could easily be plus and minus 200t to 1,000t of gold in any year, if it cancelled itself out. Or to put it another way, a CB (Central Bank) could sell / swap 200t or more of gold to another CB in any year, and no one need necessarily know.

As CPM stated in the China Gold Congress in September 2014, they thought that the supply/demand gold equation was ~6,200t or 200moz of gold "out" due to the way forwards and hedging had been "handled" (see page 8 of the October 2014 ERA "Comment" report on the www.eagleres.com.au website).

However, in the case of iron ore, China has shown that it is very clearly a master trader. As shown in the Figure, China has increased its iron ore imports every year, and those imports have doubled from ~435mt in 2008, to currently (2014) >870mt (in October 2014, they were reputedly ~77ktpm), but yet China now (7 Nov 2014) pays less than half of the cost at <US$80/t.

How ? - quite simply by stating each year that growth and iron imports have peaked or are peaking (or "make noise in the east, attack in the west"). And then China has scored even more because the CNY has appreciated against the US$, so it now pays half the cost in US$ and even less in CNY/RMB terms. China forecast iron ore prices to be about $80/t in 2015, as shown in the Figure and in fact expected them to stay at that kind of level for the foreseeable future (ie >10 years). It was also stated that FMG will not be allowed to fail/fall.

It was commented that the iron ore price could occasionally drop to possibly (said with a laugh) ~$70/t, but it wouldn't stay there, it would soon recover to ~US$80/t.

Imagine if China had stated in 2008 that it expected its iron ore imports to double in about the next 5 years (which is what a fully developed western world country would probably have done), the iron price would most certainly not have halved, The increased iron ore production would have been viewed as struggling to meet demand.

In the Q & A after the main iron ore commodity session at China Mining 2014 (there were about 4 other presentations covering iron ore), a question was asked whether you (China) intend to dump iron ore on the market to keep the price down (based on China's willingness to accept all Australia's  iron ore expansion or of the Big 4 to ~1.3bntpa as shown in the Figure), but yet China's peak import requirement is apparently only ~900mt ?.

The reply was that China will not be dumping iron ore on the market, yes China's import requirements are only ~800mtpa to 900mtpa (for its domestic consumption), the rest is for crude steel exports. (And apparently in 2014, crude steel exports are expected to be ~80mt to 100mt or more). It is the first time that a Chinese presenter has used the words "domestic consumption", it was clearly in the "fine/small print". I asked another delegate (/iron ore specialist) if they had ever heard that before, and they said "no".

In the uranium session that was held on the first day, China stated that it firmly believes that the uranium price has bottomed. It has commissioned 3 nuclear plants in the past year (one of which is in Shanghai), leaving 31 under construction. Most of them appear to be small at possibly 0.5mKw to 1.0mKw and located amongst the 11 eastern coastal provinces, as reflected in the jump in 2014 in the nuclear power contribution and steady rise of nuclear power after that as shown in the Figure.

In the China Nuclear presentation that included the uranium statistics, the 31 new reactors were expected to add a further 28.4mKw taking capacity up to 58mKw, and there are another 60 reactors planned. Uranium demand was forecast at 68kt in 2012 increasing to 72kt in 2015 and 87kt in 2020, being met by supply of 50kt in 2012, 59kt in 2015 and 76kt in 2020.

Part of the supply increase would have to be the 6,500tpa Husab uranium operation in Namibia being built by CGN (China General Nuclear) for ~$2.5bn, which has started mining with a target for plant commissioning/production by October 2015. Husab expected to employ ~6500 people in its construction period and ~1500 people in operation, and apparently could increase Namibia's exports by 20%, and GDP by possibly ~5%.   

Japan has also started that it is considering restarting its aging nuclear reactors to help solve its power crisis issues.

In a presentation to the Oriental Mining Club in Beijing (after China Mining), South Africa's Minister of Mines, Dr Ngoaka Ramatlhadi stated that four broad nuclear agreements were expected to be made including one with France and the expected latest one with China, along with offshore oil and gas exploration that could potentially make South Africa self sufficient. Sinosteel had also built two chrome refineries in Limpopo province.

The increase in uranium / nuclear power is of course at the expense of coal-fired power stations (also shown in the Figure), in order to reduce the levels of pollution in the coastal cities. The coal-fired power stations are to be in the centre and especially in the west of China, with electricity transferred with apparently relatively less loss (due to a new innovation) for up to ~2000km to the eastern provinces, and hence the growth in power imports also shown in the Figure.

China estimates that power can be produced from hydro or coal-fired in the west and transferred by wire to the east for less than it costs to produce coal-fired power in the east. Coal in the east was more likely to be converted to gas/liquids for use. Coal-fired power in the eastern provinces was expected to have fallen from 80% to 65% and then <50% within 5 years.

It was commented that the greatest impact was expected to be on the coal mining industries of Australia and Indonesia unless they produced products that could be transported over large distances inland. However, It has also been commented that Japan is reputedly looking for additional sources of coal.

Indonesia was perceived as scoring significantly from its decision to insist that refineries and smelters have to be constructed to export Indonesia's metal products. Indonesia expects to benefit in the future when the refineries and smelters are in production.

Hanking stated that refinery approval had taken about 2 years during which time it has spent ~$150m on infrastructure for its first 10kt to 15ktpa nickel refinery. A power plant has also to be built in addition to the expected $0.5bn to $0.7bn for the refinery (which is about 1/4 to 1/3 of the $2bn western world quote), with completion expected in possibly ~3 years. When it has completed the first refinery, it expects to start on the next. There are apparently at least 2 other small Chinese built nickel smelters/refineries at various stages of construction.

Shandong Nashan (China's 2nd biggest aluminium producer) has started construction of its $5bn aluminium smelter to produce 2.1mtpa of alumina and 0.57ktpa of aluminium ingots, together with a 300MW power plant on Bintan Island. Another Chinese aluminium producer China Hongqiao has also stated that it intends to build an aluminium refinery in Ketapang to start production possibly in 2015.

Freeport came to an agreement with the Indonesian Govt to export 1.1mt of Copper cons at higher royalty rates in the remainder of 2014, provided that it starts construction in 2014 of a 400ktpa copper cathode smelter in Gresik for $2.3bn with production commencing in 2017. Such a smelter could involve China as China's costs are much less than western world costs. Newmont has also been allowed to ship copper con from its Batu Hijau operation in October 2014, but no details of a refinery/smelter have yet been released.

The Philippines was currently not expected to follow the Indonesian downstream refinery/smelter requirement route, as Indonesia had first asked for the smelters to be constructed in 2009, ready in time for 2014, which gave the producers ample warning of what was coming.

The general expectation of western world presenters at the conference was that base metals were currently in a down cycle and expected to level out as an "L" shape for up to another 18 months to 2 years, at which time the cycle should begin to recover.

China does expect commodity prices to eventually rise significantly, as it was stated in the conference that China tells its banks to lend money (because the Govt guarantees the debt) to its SOEs, resulting in some SOE's having debts of 60% to 90%. Such as the $7.005bn acquisition of the 2mtpa copper in cons Las Bambas project in Peru, mostly by MMG (62.5%) with Guoxin and CITIC. However, such funding has to be for material production with long life potential resource assets, (based on profits being realised from future higher commodity prices). Yet another read the "fine/small print" item.

Although some commodity analysts now focus more on China's pmi statistics than the GDP numbers, great emphasis is still being placed on GDP numbers (symbolising growth and metal prices), even though China has stated that it is less reliant on them and instead now uses a basket of over 40 indicators as indicative of growth, with one of the newest parameters being technical innovations.

The two main GDP players are now very clearly the USA (and Comex futures / CME) on $16.8trn, followed by China (and Shanghai futures / SFE) on $9.2trn; then Japan 4.9trn, and Russia 2.1trn. The market has been focusing on China slowing down resulting in less GDP growth but has completely missed the fact that some parts of China (Tianjin, Wuhan, possibly Xian) and Western China etc are in frantic growth, and that China is building the world, especially Russia.

China's GDP may fall to 7% or lower,  but there are two key issues. Firstly at  almost $10trn in 2014, 7% means adding another $0.7trn (or almost another Indonesia [currently $0.87trn in 2013] every year). And in terms of metal consumption etc, China is going to have possibly an additional 1% or so in "export GDP", external to China in other countries of the world. It was remarked that China now has over 1m people in Africa working on numerous projects and operations.

In one of the presentations it was remarked that China has completed a hydro power plant in Ghana that is significantly more efficient than the previous one, and is examining the possibility of generating hydro power in the DRC supplying the DRC and parts of Africa.

China is now the world leader in high speed rail construction and trains, and is to deliver high speed trains to California and Boston. It has won contracts to construct high speed rail links from Mombasa to Nairobi in Kenya over 480km (May 2014); the 770km link from Moscow to Kazan (where the world cup soccer finals are to be held and reduce the travelling time from 13hrs to 3.5hrs) for $10bn and to be completed by 2018 (October 2014).

And then there's the 210km link from Mexico City to Queretaro for $3.7n, to be completed by 2017 (negotiated in November 2014). The Mexico City link is apparently up for re-review because only China bid for it, and possibly not enough time was given for other parties to "have a go" at entering bids, though whether they can match China's experience, construction speed, cost and efficiency is another question. At least if China's says it will be completed by such and such a time, then it will without overruns.

China is also on the short list to build the 1287km high speed rail link from LA to San Francisco that requires ~18 to 20 trains and construction of a train manufacturing factory (as required under US law), and that's aside from the feasibility studies in Vietnam (link Lao Cai, a China border city to Hanoi), Thailand (Bangkok to Nong Khai, and eventually China), Romania (Belgrade to Bucharest), and coastal Nigeria.

China is establishing faster train links from Chengdu to Hamburg, and partial control of Hamburg's port. Within China, the new 1776km high speed rail link between Urumqi in Xinjiang to Lanzhou in Gansu is scheduled to be opened later in 2014 (construction started in January 2010), with the Beijing via Zhengzhou to Xian and then Urumqi link ready by 2017 reducing the travelling time from ~40hrs, initially  down  to ~16hrs.  The Urumqi link is part of the plan to pass along the Silk Road route through Kazakhstan and Moscow to Poland etc, or to Istanbul and then via Venice to Hamburg as a faster alternative.

China expects to construct an east-west gas pipeline through Russia with ~ 4 gas pipeline connections into China for the ~38bn cu m of gas per year to China for ~30yrs under the $400bn agreement signed earlier in 2014, plus upgrading Russia's power, communication and IT networks. The sanctions against Russia are basically encouraging Russia to ask China to develop it.

And if that's not enough how about China's own infrastructure and plans, such as the new $40bn infrastructure & development fund (reported on 9 Nov for the Mainland Silk Road connection that is separate to the Maritime Silk Road connection. The Asian Development bank has estimated that it could require up to $730bn per year by 2020 on infrastructure development.

In one of the China Mining presentations, it was stated that China's infrastructure spend in 2013 was up 22% and would need to remain at 15%pa for the next 10 years to meet the required "goals". I thought that had to be wrong (I surely must have misheard it), until I encountered handout data on Tianjin showing that it alone spent $200bn on infrastructure in 2013, of which $60bn was municipal, ie $30bn on transport, $26bn on real estate, and $2bn on railway construction : the airport metrolink was now open, and 70 stations were under construction on the new 5 and 6 metro lines. Tianjin's GDP in 2013 was up 12.5% to $287bn.

China has shown that it now effectively controls the commodity price markets, by word, action or inaction, a situation that had to eventually develop due to China's majority consumption or production of almost all commodity  products. China has often stated that producing companies should be able to be profitable but not make mega profits at its (China's) expense.

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. China's Iron Ore Imports, and Coastal Provinces Power Supply