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China: The World's Copper Magnet |
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Written by Groupmark China Team
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Tuesday, 06 October 2009 08:06 |
Over the past eight months, much has been said about China's voracious demand for metals. A recent article by Bloomberg (click here) declared that "China's Metal Demand Returns in A Big Way" and several other mainstream news sources have reported the same. Nowhere is China's extraordinary demand for metals more apparent than for copper. From Jan-Aug 2009, China imported 3 million tons of unwrought copper, up 75.8% YoY, which is already well past comparable imports for all of 2008. Over the past two months, China's copper imports have moderated a bit, hitting 325.1k tons in August, down -20% MoM (July was down -14.6% MoM in July)( Source). This MoM downtrend is likely to continue into September (September trade stats are due out from Customs around October 11). But in our opinion, this is a short term phenomenon due to temporary oversupply in the domestic market. Copper imports will likely rebound toward the end of this year and early next year, further reflecting China's voracious demand for international copper.
What's driving record Chinese copper demand in 2009?
(1) Underlying consumption. Underlying demand for copper has remained strong this year due to stimulus-driven investments in power, infrastructure, construction and other related sectors. The traditional low season (May-July) was hardly low this year and utilization rates at copper smelters are high at the time of writing.
(2) Speculation. Earlier this year, Chinese traders were importing massive amounts of copper supplies in order to arbitrage the price discrepancies between domestic and international copper prices. With international copper prices depressed as a result of weak foreign demand, Chinese traders purchased copper abroad and then flipped their stocks into the domestic futures markets.
(3) Massive credit growth. Throughout H1, 2009, banks made record loans which found their ways into the hands of copper buyers. This accelerated and expanded the scale of copper purchases throughout the industry. In some cases, traders could even use their existing copper stocks to secure loans to buy more copper stocks, thus perpetuating the cycle.
(4) Commercial/Strategic Stockpiling. The government and commercial buyers have bought up copper this year in order to take advantage of lower prices.
Western views of the Chinese copper story tend to be demand-based, focusing on how incredible economic growth has spurred unprecedented consumption of copper wires, copper bars and rods, plate and foil and the like. More often than not, "robust copper demand" is linked to rapid economic growth in a macro description of China's rise to the global stage.
But Chinese views on the ground are more supply-driven, instead focusing on the dearth of copper at home, and what it will take to secure future supplies. China may be a country rich with natural resources, but it lacks copper, which is critical to its high investment growth model. Looking at China's refined copper output (~400k tons per month), one may come to the conclusion that the country is a large producer of copper, and its reliance, although significant, is not of serious concern. However, this overlooks the fact that China is not only a heavy importer of refined copper and copper products, but also copper concentrate, and copper scrap.
China currently imports about 2/3 of its copper concentrate and all of the scrap it uses in producing refined copper, due to a lack of the resources at home. This may not be immediately apparent to foreigners who look only at headline import figures. But Chinese buyers, which include the government, are well aware of the growing dependency issue. The more reliant the country is on foreign copper, the more vulnerable its investment-led growth model will become as international prices fluctuate and climb higher over time. To many Chinese companies, the issue is not just one of profitability, but survival in the marketplace. This is why Chinese companies are more focused on the supply side of the story.
How do Chinese suppliers intend to secure supply of copper for the long term?
Africa and South America. In fact, today, most Chinese copper imports already come from Chile in South America and Zambia and Congo in Africa. These are two regions that China can trade its nation-building expertise for valuable resources, without facing much competition from the US and European nations. For example, China can offer USD loans to African and South American governments in exchange for either guaranteed deliveries of copper product or equity stakes in local resource companies. They can also trade infrastructure development and know how for long-term access to copper resources that will enhance domestic energy security in the mid-term. For more insight into how this works, readers may want to check out the book China Safari: On the Trail of Beijing's Expansion in Africa.
It is therefore not surprising that China has made extra efforts in recent years to strengthen its bilateral relationships with countries in South America and Africa. These are strategically important trade partners today, but will become even more important in the future.
In the near term—investors should beware of volatile prices in the copper markets. Underlying Chinese demand is coming back but not fast enough to outpace domestic oversupply. This is likely to continue in the coming months. Domestic copper stocks in China have been growing rapidly since the beginning of this year and production remains high at the moment. Copper stocks at Shanghai Futures Exchange (SHFE) have grown to more than 100k tons in September. And Antaike, China's most authoritative metals industry association, says that total copper stocks may have reached about 1.2 million tons.
As for imports, the picture is bearish until at least Q4. Oversupply means that smelters will have little need to import large amounts of copper supplies, and the closing of the arbitrage window (which means foreign copper is now more expensive than domestic copper) suggests that speculators will have little incentive to import as well. The main support story for imports comes from the Chinese government which may boost purchases before the end of the year in anticipation of higher prices in early 2010, once foreign demand rebounds. |
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Last Updated on Monday, 12 October 2009 12:15 |
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China's Growth Enterprise Market (GEM) - Tough Sell in The Short Term |
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Written by Groupmark China Team
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Friday, 25 September 2009 05:29 |
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The time has finally come. After more than ten years of preparation, China is preparing to launch its GEM Board, commonly referred to as the "NASDAQ of China." GEM is expected to provide a fresh financing channel for China's small, high-growth start ups. So far, CSRC, China's securities regulator, has already granted conditional approval to seven companies for listing, and authorities are on their way to approve another six companies in the near term. Most people believe that "now" is the perfect time for China to launch its new stock martket. Emerging SMEs have huge demand for capital, and although Chinese banks have been lending at an astonishing pace this year, most of the funds are going to state-owned enterprises. Some even suggest that with the rise of GEM, Chinese companies will opt for domestic listings over foreign listings in Hong Kong and the US, where Chinese companies have opted to list for years due to the challenges and barriers of listing within China. But this is unlikely. On the ground, we are already getting the sense that GEM will face the same regulatory, bureaucratic and listing demand bottlenecks that plague China's major stock exchanges in Shanghai and Shenzhen. For one, Chinese companies listing on the GEM will need to meet the exchange's strict listing requirements. Right now, there are estimated to be 40-50 million SMEs in China, but only 3,000-5,000 companies that actually meet the GEM's listing requirements. Secondly, thousands of companies want to list on GEM, but only a token few can get approved quickly enough. This suggests that even companies that are qualified to list will be forced to wait, while their capital-intensive businesses cannot afford to. Will the GEM help solve the financing difficulties that Chinese SMEs face and give VC and PE firms an exit to their investments young Chinese SMEs,? Yes—but, in the long term. For now, many of China's fastest-growing companies will continue to pursue listings in the US and abroad, where financing, liquidity and transparency are easier to come by. |
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Last Updated on Friday, 25 September 2009 05:51 |
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Updates: September 24, 2009 |
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Written by Groupmark China Team
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Wednesday, 23 September 2009 21:45 |
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China's rural households appear more bullish about spending than their urban counterparts MasterCard released a survey report which said that China's massive economic stimulus package has triggered higher household spending plans, led by rural areas. According to the report, 41% of urban households and 59% of rural households said they intend to increase their spending in the next 12 months. Rural households appear more bullish than their urban counterparts, driven by expectations of an increase in income. Nearly 81% of rural respondents said that they expect their household income to rise. Other drivers of spending include optimism about the rural economy and government policies implemented to encourage spending. MasterCard conducted the survey in July and August in the cities of Shanghai, Beijing and Guangzhou, and in the provinces of Jiangsu, Shandong and Shaanxi. [Beijing Youth Daily, 2009.09.22] ADB sees 8.2% rise for China's economy The Asian Development Bank raised its forecast for China's economic growth this year to 8.2%, twice the average pace it estimated for growth in Asia outside Japan. The bank revised its China estimate from 7% in March, citing the effects of the government's stimulus package. The report, released yesterday, said growth in 18 developing economies in Asia would rise 3.9%, with China's economy topping the list. The bank also upgraded its forecast for China's growth next year to 8.9% from 8%, based on expectations that the government will continue stimulus spending and the world economy will show a moderate recovery. "The stimulus package and the aggressive easing of monetary policy in 2009 have softened the blow of the global slump on China's economy," said Jong-Wha Lee, ADB's Chief Economist. "The government's 8% growth target for this year now looks within reach." [Shanghai Daily, 2009.09.23] China issues new policies to shore up SMEs China's State Council, the Cabinet, issued a document Tuesday to strengthen support for the development of the country's small-and medium-sized enterprises (SMEs). The government will deepen reforms in the country's monopoly industries, lower the market access thresholds for the SMEs and create a more open and fair competitive environment for SMEs, said the document. According to the document, the government will optimize its procurement mechanism, raising its purchase proportion of commodities, engineering and services from the SMEs. The government will grant a one-year reprieve on the social security fund of the SMEs in operational difficulty, amid the global financial crisis, in a bid to reduce financial burdens and to protect the interests of the SMEs. It will expand channels for the SMEs to raise capital by encouraging banks to lend more money to the SMEs, stepping up policy making efforts to guide private capital to tap into the country's financial system. The government will increase tax breaks to small firms with an annual taxable income below RMB 30,000 (US $4392.40) from January 1 to December 31 of 2010. [China Economic Online, 2009.09.23] |
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Last Updated on Wednesday, 23 September 2009 21:53 |
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The New Energy Vehicle Mania |
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Written by Groupmark China Team
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Monday, 21 September 2009 05:37 |
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It seems that all of a sudden the pursuit of new energy vehicles has become "universal," as if any automaker that fails to incorporate new energy into its strategy will be immediately eliminated from either the market or by government policy. In the Shanghai Auto Show this past April, almost all automobile companies exhibited their newly developed green vehicles. But one has to ask: Has China become, or is China on its way to becoming, a real, new-energy-vehicle power? Many analysts believe that China will become the world's largest producer of environment-friendly cars within 10 years, due to its central government backing and the ambitions of its domestic car makers to support electric vehicles. China's car companies are at a technological disadvantage when it comes to making internal-combustion engines, but the playing field for all-electric vehicles is nearly level. As a result, it would be easier for Chinese low-cost vehicle makers to switch over to electric vehicles than their international counterparts. The State Council issued a plan in March aimed at turning China by 2011 into a global leader in new energy cars, including electric ones with an annual production capacity of 500,000 units. Executives of automakers responded actively as they saw the shares of BYD, China's leading company in electric car manufacturing and backed by US investment guru Warren Buffett, skyrocket to nearly HK $50 per share, five times higher than its local competitors. The opportunity is real, but is the market ready? Are the Chinese automakers capable of capitalizing on this opportunity? Toyota, the pioneer in new energy car development, put on the market the world's first new energy car, PRIUS, in 1997. By August of this year, its accumulated sales had reached 2 million units, not anything impressive compared with the annual sales of tens of millions of cars in the global vehicle market. BYD, since introducing its hybrid electric car last December, has sold just 80 of them. Chinese customers are not ready to switch to electric cars for the moment. According to Bain's recent survey of 500 car owners across China's large cities, budget-conscious "cost shoppers" represent the major market segment of potential buyers (60%). BYD's F3D M is priced at RMB 149,800, or $ 22,000, higher than its local competitors by nearly 1/3. Also, the car takes seven to nine hours to fully charge, it is very inconvenient compared with refueling, and there is no infrastructure with battery-charging stations to support pure electric models.
On the corporate side, new energy car development requires large R&D investments over a long period of time, in contrast to executive motives to earn quick money. How many executives of China's state-owned vehicle manufacturers are willing to invest in new energy vehicles is unknown, since they are mainly evaluated by the company's annual profits. Considering their term in office, investing in new energy vehicles is risky. Consequently, the majority of them chose the safest way by developing an attractive long-term plan and increasing investments in a joint venture. Without independent technology, these automakers can never become real competitive players.And so, the government is left in an embarrassing situation. Up until now, China's policy makers have not clearly indicated the main direction for China's new electric vehicle development. They do not want to take risks. Once such policies are issued, all the auto companies will rush into the suggested areas, the consequences of which will be difficult to measure. Finally, worth noting is that the government will have to deal with new issues, such as oil and electricity pricing, that will arise from this new industry, |
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Last Updated on Monday, 21 September 2009 22:58 |
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