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Every year when TMS comes around, I try to bring you news and gossip as it comes up.
This year, the event will be held in Orlando. We are now in the grip of the dreaded 3-year cycle. The planners have always tried to share the event around between the East Coast USA, West Coast and somewhere in the middle. So we have had years in cities as boring as Charlotte North Carolina to as lively as New Orleans and San Francisco. But since about 2011, the event has been cycling through Orlando Florida, San Antonio Texas and San Diego California.
Of the 3, Orlando is the worst. You are captive to the Disney behemoth, and it’s a crazy sight seeing a bunch of suited businessmen trying to meet in the same hotel lobby as holidaying families and kids in bathers. It’s also about as far as you can travel if you are coming from Asia. It will take me 30 hours to get there.
This year I decided to do my own meeting bookings, rather than leaving it to an assistant. Bad move - despite my careful maintenance of the Excel Spreadsheet, I have still managed to double book a couple of meetings. I have also reduced my meeting count to only 36, by not booking any meetings for the Saturday.
So much easier to blame an assistant for stuffing the meeting schedule! Now I only have myself to blame. (I write this because I am sure all you experienced TMS attendees have been there!)
So I am off to a shocker on several counts - still trying to move meetings around at the last minute before setting off on a cruel flight plan.
I will bring more news and photos as the opportunity arises.
Stewart Hamilton, a rising star in Rio Tinto’s Pacific Aluminium subsidiary, has left the company to take up a new role in Tanzania.
Stewart’s most recent role was as General Manager of Business Improvement & Technology, but had had several gigs prior, including management roles in the NZAS smelter on the southern tip of New Zealand and in the Brisbane Australia office.
Last Friday Alcoa announced that it was conducting a 12-month review of its primary aluminium and alumina assets, with a view to possible closure or divestment.
The announcement seemed to catch the market by surprise, and led to all sorts of theories and postulations. Some Australian newspapers were worried that it could lead to further cuts to Alcoa’s footprint in that country. Others saw the announcement as a response to high levels of Chinese metal leaking into China’s markets, while other commentators linked it to the falling premiums.
Let me address a couple of those points and raise some of my own ideas.
* Chinese semis exports. I highly doubt that Alcoa would take a structural action in response to a temporary situation. Sure Chinese reports continue to climb, but that phenomenon could stop at any minute. The entrepreneurs who are making money on the trade will continue to do so only for as long as there is a buck in it. Falling premiums hurt the equation for them too. As we have reported before, the Chinese government is contemplating removing the VAT refund. And if the gap between the LME price and the SHFE price narrows, that could also hurt. Any single event of these three could be enough to stop the one way traffic almost overnight.
Besides, if one takes a big picture view, China is not structurally set up to be a major long term supplier of aluminium to the world. More and more of its capacity is moving to the Northwest, some 2000kms from the nearest major port. I can’t see China being a reason why Alcoa would close aluminium capacity. And as for alumina capacity, Alcoa has 3 refineries in Western Australia all of whom could stand to benefit from a growing China aluminium industry. Or a growing Indian or Middle Eastern industry.
* Premiums. As I understand the way aluminium companies work at the board room level, premiums are not part of the equation when evaluating long-term profitability. Like Chinese semis exports, the rise in premiums is a relatively recent phenomenon, and although aluminium companies benefited from the rise in premiums, that isn’t to say that they have changed their long-held profitability models. Premiums go up and down, and historically have not been hedge-able. Besides, if one looks at the long term structural position, the future for premiums is positive. As metal production centres become more pronounced - Middle East, French Canada, India, perhaps a basket of South East Asian plants once the Vietnam smelter is built, then one can see that production of aluminium is occurring in places well away from where it is being consumed. If one believes the hype about the US auto industry switching to aluminium panels, then the USA will be net short of metal and delivery premiums to that country will rise.
I doubt Alcoa would make a structural change to its asset portfolio because of premiums.
So, why is Alcoa doing this? I presume as a publicly listed company they are obliged to reveal strategic reviews of assets, to keep shareholders informed. But this review seems to be no more than an update to an ongoing review. Alcoa has been shutting plants since regularly over the last couple of years, and such decisions do not come lightly. Certainly on face value, the motivation to move further down the cash cost curve is a valid one. But that’s not an exercise you do sporadically. Profit centres and those who manage them are looking at where they stand all the time, and figuring out how to improve all the time as well.
Could there be another reason why this announcement came out when it did? And why is it that Bob Wilt was quoted, when as I understand it, his portfolio does not include alumina? To me, it’s possible there were other reasons why this announcement came out when it did and in the way it did. Could it be that we finally see some assets moved into a new entity, similar to what we reported about a month ago? Time will tell.
In case you were wondering about the answers to the Petcoke questions I posed in a recent post (Who Am I?) Here are the answers:
Q1. Iran purchased just over 32,000t of CPC from China, with the price falling to as low as $255/t.
Q2. The sales history showing in this question belonged to ZCGG (not including their Suyadi subsidiary).
Q3. The countries and their % reduction in CPC prices were:
- Australia 22% reduction in prices 2014 compared to 2013
- Russia 28%
- UAE 3%
- India 12%
- Iran 21%
Q4. The 6 Chinese oil refineries produced the following petcoke volumes in 2014:
Sinopec Qilu Refinery = 764,000t
Sinopec Gaoqiao Refinery = 510,000t
CNPC Jinzhou Refinery = 263,000t
CNPC Fushun Refinery = 403,000t
CNOOC Huizhou Refinery = 829,000t
Independent Dongming Refinery = 660,000t
Q5. A total of 50 of China’s refineries produced at least 100,00t of anode grade petcoke in 2014.
Q6. Export CPC had fallen to only 15% of the LME price by Q4 2014. That was due to both numbers heading in different directions - the LME rising and CPC falling. It was a big difference to 12 month earlier, when the ratio was at 20%. It’s an important ratio, because as one aluminium company said to me, the revenue from LME sales is the only source of funds to pay for the CPC.
Thanks to those of you who entered.
All of this information was in the latest Semester Pricing Handbook. If you want to learn more about this valuable resource, simply complete this contact form.
Liang Hui (两会) is Chinese for “two meetings”. The term describes what’s happening in Beijing this week - the annual gathering/talkfest that is supposed to be China’s national Parliament. (The word parliament comes from the Latin to talk or speak, so in that respect it’s an appropriate term.)
Each year for one week China’s Lower House, the National People’s Congress comes together to propose laws and pass resolutions. That is followed by the CPPCC - the Chinese People’s Political Consultative Conference - a sort-of Upper House or Senate.
Neither meeting packs the clout that a counterpart parliament would have in an England or USA or Australia. If anything, the lower house meeting has more significance, since it is usually at the end of this meeting that the Premier gives his annual economic address, and it’s usually the only time of the year when the Premier takes questions from the Press.
That significance has been watered down recently. For a start, Premier Li Keying does not have the same public profile as his predecessor Wen Jiabao had, with President Xi Jinping seemingly hogging the limelight. And in recent years, the press interview has been turned into a laughing stock with mock questions from supposed foreign journalists destroying any credibility.
The CPPCC meeting is more of a bucket list meeting. It’s on the bucket list of many Chinese to be selected to be a part of the meeting, and it’s a bucket list of aspirations, hopes and crazy ideas that get airplay out of this meeting.
Not that either meeting delivers any direct benefits. The Party decided well before this week what the economic and cultural and social agenda would be, and President Xi’s “Four Comprehensives” take the air out of any possible surge of interest in any particular ideal. As I said, the NPC meeting is often a kick-off for economic agendas for the short to medium term, but that’s more a matter of good timing, coming so close after the annual vacation period.
Possibly the most tangible outcome for Beijing residents is that factories are forced to close, so the air is cleaner while the meetings are on. Traffic is better controlled, so it’s easier to get around the city.
Outside Beijing, the effects are also very short-term, but in a different direction. It’s said that pork prices go up at this time of the year, since there is a huge demand in Beijing that sucks available supplies out of other markets. Perhaps this year will be different, with President Xi’s crackdown on corruption and excess. But it is hard to see so many well-connected citizens coming together without the odd banquet happening somewhere around the city - quietly and with no fanfare.
David Love has departed Sinoway International. I understand his contract was terminated recently amid the depressed coke market and gloomy outlook. Petcoke sales from the US to China dropped by almost half in 2014, and even the most experienced and well connected traders were left reeling by the downturn.
David was with Sinoway a little over 2 years, having previously been with Argus for 11 years. David has indicated he is on the lookout for new business and/or employment opportunities. I won’t post private email addresses here, but contact me if you want to reach out to David.
The petcoke business previously managed by David has now transferred to Jenny Zhao.
We foreigners pass judgement on the terrible pollution in cities like Beijing and Tianjin and Baoding and hundreds of other cities, but does the average Chinese citizen care?
You bet. Just consider the case of the video posted yesterday by Chai Jing. Ms Chai was a relatively famous TV personality in China, who gave up her job to investigate and examine the pollution situation around the country. She released a 5 minute video on line yesterday, which at the time of this post had secured 100 million views. That’s 100 million in 24 hours, an incredible result on many levels.
The video itself, called “Under the Dome”, link here, shows scenes that we who know China are well used to. Some scenes seem a little scripted, such as when she asks a child if she has ever seen the stars in the night sky, to which the girl answers no. But the fact that 100 million people have viewed the video speaks volumes for how much of an issue pollution is to the average Chinese citizen.
That in turn begs the question, how come the authorities allowed the video to stay on line, or even be screened in the first place? Various theories are circulating, from the suggestion that the censors were asleep at the wheel, to the theory that there is government money behind the production of the video. Pollution is a topic that can’t be swept under the carpet, so perhaps the view is to assist with naming and shaming those who pollute.
The producer Ms Chai has promised to provide English subtitles, so to understand the video at present you need some Chinese, though some of the images speak for themselves.
The big news coming out of China today is the rollout of a new set of pronouncements from President Xi Jinping.
The pronouncements have the distinctly Chinese label of the “Four Comprehensives”, and appear to be getting the same elevated status as former President Jiang Zemin’s “Three Represents”. Former President Hu Jintao had his own “gospel”, which he, being an engineer by trade, called the “Scientific outlook on development.”
So it’s nothing new that Chinese Presidents deliver their pronouncements to the masses. What is interesting in the Xi version however is the heavy emphasis on control and reform.
The Four Comprehensives are: Comprehensively building a moderately prosperous society, comprehensively deepening reform, comprehensively governing the nation according to law, comprehensively strictly governing the party. According to the Chinese press, the crystallisation of these concepts is not a new development. The official line is that he has been governing according to these principles since he took office.
And that gives us a clue to what the Four Comprehensives are really all about. In the official Communist Party model, reform means getting back onto the right path, not changing for change’s sake or adopting Western ideas. Quite the opposite in fact. The Internet in China is now becoming more like an intranet. Journalists are being restricted more than ever before. The debate over “Rule of Law” has now been adjusted to mean “Rule by Law”.
No single action undertaken by President Xi in his short time in office should be seen in isolation. One needs to understand that the crackdown on corruption is being done at the same time as the change in rhetoric about economic growth and purity of Party thought. The overriding principle for the ongoing survival and enrichment of the Chinese nation is that the Party be paramount. The Party sits above the law. The Party oversees economic growth, not to mention defence and foreign policy. For these reasons, the Party must be constantly purified. Essentially it’s no different that Chairman Mao’s occasional purges, when those deemed as being Right Wing were sent to re-education farms, though the 21st century version is more nuanced and discreet.
What does all this mean for the aluminium industry? Essentially nothing new, though perhaps motives for certain actions may become more apparent. The ability of SOEs to behave in certain ways, raise capital and make decisions may start to more clearly reflect that the puppet master continues to be the Party. We in the West begin to not notice the puppet strings, so caught up are we in what is happening here and now in markets. We wonder why Beijing talks about over-capacity in the industry, but when the chance comes to do something about it, the walk doesn’t match the talk. Regional and local governments step in with subsidies and other forms of support to keep sick and dying plants alive, rather like a dying patient on a life-support system. Controlling debt and credit risk is rated as being more important than the health of the market or the industry, since debt and credit risk pervade all aspects of the economy.
Coming back to the Four Comprehensives, it’s also interesting to note that the first point calls for a moderately prosperous society. One reading of that turn of phrase could be that the health of the party and the pillars of society are of greater importance than the prosperity of the masses. Why say “moderately” prosperous? Why qualify the noun at all? Because the people’s best interests are served by a strong, pure, strict party which controls the pulleys and pillars of society wisely, in the eyes of those who lead the country.
四个全面
China’s Flash PMI number came out today, with a slightly better 50.1 for February. Some commentators have described this as encouraging, but I for one find it difficult to assign any optimism to this number.
This February has had a loss of at least a week of production time, with Chinese New Year falling on Feb 19. Factories and offices returned to work today. To collect the data from factories to get this month’s Flash PMI number, there’s only one way that could have happened. The data must have been collected prior to the 18th, and probably rolled up, cleansed, filtered and seasonally adjusted prior to the holidays in order for HSBC to release the number within an hour of the working month resuming.
In an economic environment that contains a lot of spurious data, this has to be a datapoint that needs to be treated with a large grain of salt. Indeed, the Shanghai base metals market seemed to think so too, dropping slightly when the market re-opened this morning.
Here’s a test for all you who are involved in any way with the international coke market. Feel free to forward this to your colleagues, and challenge them too!
Which country had the following history of CPC purchases from China in 2014?
Q1 10,000t at US$285/t
Q2 2,500t at US$255/t
Q3 Nothing
Q4 20,000t at US$258/t?
- Which Chinese CPC supplier had the following sales history in 2014?
Q1 20,000t at US$311/t
Q2 100,000t at US$285/t
Q3 70,000t at US$274/t
Q4 55,000t at US$251/t? - We know that CPC prices dropped through 2014, but can you pick which country got the biggest reduction in price/cost? See if you can match the country to the % reduction in this list.
Australia 22%
Russia 12%
India 3%
UAE 21%
Iran 28% (Hint, one of these figures is alongside the correct country, so you only need the other 4… if you can guess which one is the right one.) (Second hint - one of these countries is the correct answer to Q1.) - See if you know which of China’s oil refineries produce the most petcoke. Sort these refineries in order of their 2014 production.
A. Sinopec Qilu Refinery
B. Sinopec Gaoqiao Refinery
C. CNPC Jinzhou Refinery
D. CNPC Fushun Refinery
E. CNOOC Huizhou Refinery
F. Independent Dongming Refinery - There are 74 refineries in China that are registered as producing anode grade coke. But how many of those 74 produced more than 100,000t in 2014?
Less than 20?
Somewhere between 20 and 30?
Somewhere between 31 and 40?
More than 41? - What was the Export CPC price as a percentage of the LME in Q4 2014? (In other words, if CPC averaged $300 for the quarter, and the LME averaged $2000, then the ratio is 15%.) This is an important metric, since smelters can only pay for their purchases using the revenue earned from selling their metal.
14% or lower?
Between 14.1% and 15%
Between 15.1% and 16%
Between 16.1% and 17%
Over 17%
All these questions can be answered using AZ China’s amazing Semester Pricing Handbook (SPH). The SPH is packed with all sorts of information, data, analysis and charts. The SPH is designed to be your definitive guide to managing your coke purchases/sales. It doesn’t matter on which side of the table you are sitting, the SPH is an invaluable resource. The next edition of the SPH is due out on Friday 27th, so make sure you subscribe soon.
I will publish the answers to these 6 questions after Chinese New Year, but there is a prize in it if you can get at least 4 of the questions right. Send me your answers using the contact form below, and if you have at least 4 right answers, AZ China will give you a 25% reduction on the subscription price of the SPH. That’s a saving of around $1000, so it is worth having a go. And even if you don’t want to take up a subscription to the SPH, send in your answers and see how you perform against your colleagues and counterparts.
Good luck!
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