China and commodity markets

[HenryTo]

Latest article from the Economist commenting on China and her use of commodities - and how there may be significant excess capacity in several commodities. Original link: http://www.economist.com/finance/displaystory.cfm?story_id=4488944
-----------------------------------------------------------------------------------
China and commodity markets

From accelerator to brake
Oct 6th 2005 HONG KONG AND SHANGHAI
From The Economist print edition

The Chinese economy has driven a boom in commodity markets. It may be turning into a drag

NOWHERE has China's growing economic influence been felt more powerfully than in the world's commodity markets. The country's enormous appetite for base metals, minerals and fuels has pushed their prices to new highs and created record profits for the companies that extract and process them. With China swallowing raw materials as fast as they can be dug up, some observers even talk of a “super-cycle” of extended high commodity prices.

However, the popular perception of China as an insatiable commodity-guzzler is now too simple. As the Chinese authorities have attempted to cool overheated parts of their economy, from construction to cars, consumption of some commodities has slowed sharply or even fallen. According to Dong Tao, chief Asia economist of Credit Suisse First Boston (CSFB), Chinese demand for oil has been just 2% higher so far this year than in 2004; demand for cement has been flat; and that for aluminium has declined by 5%. Analysts had been expecting growth of 10-12% for cement and 6-7% for oil and aluminium. Even though GDP growth still looks robust, at 9%-plus, Mr Dong thinks that “the economy is losing momentum perhaps faster than the market currently believes.”

Slowing demand has hit prices. It is also turning China into a net exporter of some of the materials for which it has until lately been scouring the globe. Take steel. So far this year the mainland has consumed about a third of world output (of 730m tonnes), and its demand is rising at an annual rate of 20% or so. But China's own production is expanding even faster, by around 30% a year. As a result, China, which last year imported about 15m tonnes, is likely to export as much as it imports this year and may have trade surpluses of 9m tonnes in 2006 and 13m in 2007, reckons Trina Chen, an analyst at CSFB. This swing has already helped to depress international steel prices. Domestic Chinese steel prices have fallen by a third from their peak at the start of the year.

China is also a growing exporter of aluminium. And its cement exports have nearly tripled so far this year. Although the base was small, this worries Taiwan Cement, a big producer on the island: no wonder, when the Chinese stuff is $50 a tonne cheaper. China's dependence on oil imports is waning too. As it expands its electricity grid, it is consuming less crude, because 70% of the country's power is generated from coal. Diesel generators, which account for around 40% of China's incremental oil demand, are being used less because China has fewer power shortages. This should eventually weaken one prop for global oil prices.

The extent and duration of China's weakening demand for commodities is hotly debated. “You have got to be careful about the China slowdown story,” warns Clinton Dines, chief executive of the Chinese operations of BHP Billiton, one of the world's largest mining groups, which has made a fortune selling to China. Demand for some commodities looks as strong as ever. One is coal, on which BHP Billiton is so keen that it could change its strategy of not investing directly in China and buy a local mine. Copper prices keep hitting record highs: China, which consumes a fifth of the world's supply, mostly for new power lines, increased its imports by more than 12% in the first eight months of the year. Uranium, for use in nuclear power stations, is also still in demand.

In other raw-material markets, the recent weakness reflects inventory corrections: aluminium consumption, for example, has dropped partly because carmakers have run down their stocks. But for some commodities, a new wave of demand may be gathering, as construction, the main driver of demand for steel, aluminium, cement and related goods, appears to be accelerating again—from growth of 10-15%, year on year, in the second quarter to almost 30% in July, according to UBS. This is in turn pushing up overall import volumes, where annual growth is now almost 10%, having touched zero early this year. The government seems less worried about the current round of building than the last, because wild borrowing seems to be financing less of it. Soon construction for the 2008 Olympics will also kick in.

Even so, Jonathan Anderson, UBS's chief Asia economist, says that he doubts a construction upturn could drive the annual growth of import volumes back to 35-40% and “make China once again the single largest growth driver of Asian (and global) trade and GDP.” Import growth, he thinks, will be constrained by slowing investment in fixed assets for heavy industries and by the excess capacity built up in the past three years.

This excess capacity is the main reason to expect more weakness in the mainland's demand for several commodities and hence in world prices. China's huge investment in production facilities for basic metals and materials increasingly will allow the country not only to satisfy its own demands but also to let any overflow wash into world markets.

Steel is the prime example (see chart). The capacity of China's 260-odd steelmakers could reach 390m tonnes by the end of 2005, up by 23% year on year, and maybe 500m tonnes by 2007. At a steel conference in Seoul this week, Nicholas Lardy, of the Institute for International Economics in Washington, DC, pointed to “massive, massive excess capacity” in China at a time when steelmakers elsewhere are curbing production growth. In aluminium, 20% of new smelter capacity in China is lying idle because of a lack of raw materials. Once that comes on, CSFB estimates, supply could outstrip demand growth over the next two years—even though demand will be rising at a double-digit pace. China's exports next year could be 1m tonnes, twice what they were in 2004.

All of this will cause political headaches for the Chinese as well as economic upset for their trading partners. Until now, China's surging exports of manufactured goods have at least partly been balanced by its strong imports of raw materials. If it now starts to export commodities and basic goods as well, trade tensions can only worsen. Steel could follow textiles as the next flashpoint.

There are signs already. On October 3rd, America's International Trade Commission agreed that rising steel-pipe imports from China were causing “market disruption”, a victory for American pipe producers who have been lobbying for protection. Recently, POSCO, South Korea's largest steelmaker, gave warning of China “turning into a threat” as South Korean shipyards develop an appetite for cheap mainland steel. And at the Seoul conference, Guy Dolle, chief executive of Arcelor, the world's second-largest steelmaker, painted a terrifying picture—for him, anyway—of a gigantic Chinese steelmaker, pushing out 150m tonnes a year.

Whether China's government will manage to consolidate the sector to this extent is questionable, given the strength of vested local interests. But that is not the point. The bogeymen are already being conjured. Both China and the rest of the world will find an end to the long commodities boom hard to handle.

[rffrydr]

2 billion barrel reserves discovered:

http://www.chron.com/disp/story.mpl/business/4668253.html

The "curse" of developed nations strikes particularly hard at chinese sense of independence.

[rffrydr]

And the story continues to unfold:

http://www.bloomberg.com/apps/news?pid=20601086&sid=af1C_fvXIkkI&refer=news
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Throw coal into the mix and this backyard giant can be viewed as China's umbilical cord:

http://stockcharts.com/h-sc/ui?s=BHP&p=D&b=5&g=0&id=p06848831105
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Steel the new textile: Was that story "wrong"? --or just out of step?

Recent govt. numbers show China imported 37.7 percent less refined copper and alloy in the first 10 months of the year (through October) vs. a year-ago. Moreover October imports were lower compared to the previous month as well (except in the category of copper ores). Exports of refined copper and alloy, meanwhile, surged 182.1 percent in the same period. The widely expected rebound in Chinese copper demand that was supposed to be taking pace by now, fueled, in part, by declining local stocks and a favorable Shanghai-LME arbitrage is still not materializing, and seems to confirm a Reuters story out yesterday that copper bulls may now have to wait until the first quarter of next year.

Zinc, despite perilous "inventories" sits at critical resistence $4000/t.

US Automakers petition President for Asian currency adjustment.

US Steelmakers press for tougher tariffs.

...And housing (except in Spain) is no longer that monster constant.