Monthly Archives: September 2011
Yesterday I was interviewed (by email) by Michael Sainsbury, China Correspondent for The Australian, and today by Cassandra Hill, of SBS TV Australia. The subject in both cases was my response to the Australian Government’s announcement of a study on how Australia might adapt and benefit from “The Asian Century”.
Prime Minister Julia Gillard yesterday announced that she had commissioned a White Paper into the major drivers in Australia - China, India, Indonesia, as well as South Korea and Japan - and how the opportunities that emerge from the growth in Asia might best be exploited.
The thing is, the White Paper must consider several countries, and how strategic, political and economic development in those countries might create opportunities for Australia. But the study must be completed inside 9 months. The terms of reference are so broad as to be almost a blank canvas (only military strategy is excluded). How the government really expects an erudite and comprehensive study in that time frame, across so many countries, is hard to imagine.
In any case, it doesn’t take a White Paper to increase spending in areas such as Mandarin Language education for children who do NOT have a Chinese heritage. Presently almost no non-Chinese ethnicity children are studying Mandarin on a formal level in Australia’s education system, and the system is set up so that schools are discouraged from teaching Chinese in any case.
It also doesn’t take a bunch of bureaucrats sitting in Canberra having a talkfest at taxpayer expense to improve the way Australia promotes and deals with Chinese tourists. Let’s not recreate the situation that occurs with Japanese tourists, where Japanese tour operators take the tourists to Japanese-owned tourist haunts and trinket outlets. Admittedly, Australia is well ahead of some other countries. France, for instance is pathetic when it comes to Chinese tourists (I speak from personal experience).
But overall, we still have a long way to go. For many Australians, we hear about China almost every day on the TV and in the newspapers, but it is no different to hearing some scientist talking about the latest discovery on Mars. There is no personal connection.
Meantime, other countries are powering ahead with their adaptation to the “Asian Century.” Some US States are further advanced in their embracing of China than Australia is. The terms of reference for the White Paper has no mention of where Australia is placed relative to its competitors for Chinese mind space. The SBS reporter asked me if China cares about the fact that Australia is launching a White Paper. My answer was no, unless and until the White Paper recommends some change to Australian law about Chinese buying Australian resources, businesses or property. In the eyes of the Chinese who even care, Australia is a quarry from where China obtains resources, and it is a small market for goods (manufactured from those same raw materials) that China makes. Perhaps the goods that China can’t sell to the USA or Europe.
But what most upsets me about this announcement is that our Prime Minister even has the notion to use the phrase “Asian Century.” IT is a term which blithely ignores the reality that Asia is made up of more than a dozen countries, each with very different histories and heritages, outlooks, prospects and opportunities. There is no common forum like in the “United States” of America, or the “European Union”. Indeed, there is a fair amount of competition and political and military tension between various countries in the simplistic grouping called Asia.
Australia still has a long way to go before it can truly say it has entered the “Asia Century.” Time for less talk and more action.
There are reports this morning of a fire breaking out in a coking unit at Gaoqiao refinery, in Shanghai. The news reports say that no-one was injured.
Gaoqiao is a major supplier of green coke to the calcined coke and anode markets in China and is often in blends for the international market for these products.
The fire apparently followed an explosion that was heard around the precinct of the refinery. It took firefighters about an hour to bring the fire under control. An investigation will be held into the cause of the fire.
It is unclear at this stage how long the disruption will continue. We will monitor and report on the situation.
Monday morning update: Gaoqiao has two delayed cokers, one of which was where the fire started. That coker, known as No. 2 coker and with a charge capacity of 1.4 million tonnes, will be out of action for about 1 month. No. 1 coker, with a capacity of 1.2 million tonnes, was unaffected and will continue to operate.
Most China watchers know that over the last several months, China’s Central Bank has tightened the Reserve Requirement Ratio (RRR) several times, in an attempt to reduce the amount of money available for loans. As well, China’s banks have shown a preference to loan to State Owned Enterprises (SOEs), making it more difficult for Small to Medium Enterprises (SMEs) to fund their businesses.
What most analysts seem to be missing is, where exactly do those SMEs go to in order to obtain working capital or to expand their businesses?
In the last several months, as the credit squeeze tightened, a new secondary loans market has emerged. Perhaps it was always there, but the size and scale are now huge.
We are hearing report of loans being made, or at least offered, with interest rates running to as high as 6, 7 and 8%…. per month!
These are rates that racketeers, mobsters and other sleazy characters would offer in back streets in Chicago or New York. We all know too well that taking a loan with rates like that is a sure way to misery and loss, but it seems to be accelerating here in China.
So, who are these racketeers who are fleecing the SMEs? The same banks who won’t lend to them. These banks send small customers to little known subsidiaries, off-shoots and shopfronts, where, the SMEs are told, they will be able to get a loan.
It’s hugely offensive, but also likely to accelerate any reform process. These banks are hastening the end of many small businesses, putting employees on the streets, and making the government wake up to the fact that something needs to be done for that sector of the economy.
The first reports are now coming through that banks are being told to loosen their loan policies, and make more loans available for private enterprise. To date, it’s on an unofficial level, and advisory from the Central Bank, but given the huge profits from the secondary market (along with increased bad debts), it probably won’t take long before the Central Bank is forced to make adjustments to its official policy. Time will tell.
September/October is probably the second most popular time for refineries to do maintenance. Summer is very popular, while this time of the year allows refineries a clear run during the peak demand times in the winter months.
Just look at the list of turnarounds:
- Sinopec Shanghai Petrochemical shut down an 8-mil-mt/yr crude distillation unit on September 17 for a month-long turnaround, with two cokers working in turns. GPC production will reduce to half in this period.
- Sinopec Jiujiang Petrochemical delay coker shut down on Sep 20 for a 40 days turnaround;
- Sinopec Luoyang Petrochemical started 45 days turnaround from August 31;
- Sinopec Changling will start 45 days turnaround from September 25;
- CNOOC Huizhou may go into maintenance after the October holiday.
Lots of analysts have been looking at the current Shanghai price for aluminium and prognosticating on what it might mean for the global aluminium market. Perhaps China will need to start importing metal, perhaps China will start relieving the international market of its glut of metal.
Certainly Shanghai metal inventory levels are now down to new lows, having lost more than 300,000t since the start of this year. In usage terms, visible inventory is now down to just a couple of days supply.
What nobody seems to be asking is, how real is this current situation? Sure the spot price is well above the 3-month price, but why?
We understand that at least one reason for the low inventory and therefore high price is that there has been some deliberate withholding of metal from the market. Our sources tell us that some weeks ago a meeting of certain producers agreed that a high metal price would be a good thing for their profitability, and for their investment worthiness.
We can’t substantiate this - it’s doubtful any minutes of the meeting would be in the public domain - but our sources are confident that the meeting took place and that a “supply agreement” was reached.
One may ask, what good is a high price to producers if they aren’t putting metal into the market. First, it doesn’t take much to create an artificial shortage. Even at its height, the Shanghai inventory level was only at about 10 days supply. Producers don’t have to hold back too much inventory to create a negative effect. Second, they can use the metal price as a basis for moving metal through finance channels. Although finance deals aren’t as attractive in China as they are elsewhere, thanks to the higher interest rates, there is still a small but active market.
One wonders whether the SRB might decide to unlock its remaining 400,000t of inventory in response.
China’s annual fluorine conference was held in Chengdu over the weekend just gone. About 150 people attended, including several from overseas.
On the Saturday night of the conference, there was a dinner for delegates. At the dinner, one astute delegate noticed that the Chairman of DFD was seated with the representative of Chenco. Readers of this blog will know that Chenco is currently in dispute with DFD over unpaid royalties. See here and here for our previous stories on this dispute.
Chenco has made it clear in their press releases that they previously had a very good relationship with DFD, and were hoping for a peaceful resolution to the dispute. Perhaps a dinner together, and more likely a meeting in private, will go some way toward that.
Our astute observer was not able to hear what they were talking about!
The announcement of an ALF3 plant (feasibility stage only) gave me cause to consider the Australian aluminium market in general.
Right now the Australian dollar is sitting just above the US, ranging between $1.05 and $1.10. The effect of this is to make export sales from Australian smelters more expensive, and puts some smelters into lower margin territory.
Currencies move around all the time, but it comes at a time when the Australian government is looking at bringing in a Carbon Tax, which will put more cost pressure on the Australian aluminium industry.
Australia’s electricity supply comes largely from coal, including the dirtiest form of coal, brown coal in Victoria, which feeds the two Alcoa smelters.
Looking at the Australian smelter portfolio, one can be forgiven for wondering how many years some of these smelters have left to live.
- Tomago - 1980
- Point Henry - 1963
- Portland - 1986
- Boyne Island - 1982
- Bell Bay - 1955
- Kurri Kurri - 1969
- NZAS - 1971
Last week we posted a piece here about a press release announcing an MOU between Alcoa and a phospate/fertilizer company called Legend. You can see the post here.
I now understand that Legend approached Rio Tinto Alcan with the same proposal, but RTA rejected the idea. I am not privy to the reasons why RTA turned Legend down, but my guess is that they saw little future in the idea. The Australian market is too small, and would require the end user (RTA or Alcoa) to put all their eggs in one basket, placing 100% of their orders with the Legend JV. That would cause the rest of the Australian market to distrust the notion of purchasing from Legend, as they would know they would be paying for the loss of margin to the JV partner. And that would leave Legend with not enough orders to make the plant viable, and will little prospects of being able to sell to export markets. The quantities and geography would not work.
From Alcoa’s point of view, they are probably happy enough to sign a non-binding MOU. If nothing else, it keeps the pressure on existing suppliers, and by encouraging the people at Legend, it helps them keep working at the idea. The upside potential is worth more than the downside risk, which is almost nil.
If I were a current supplier to Alcoa for ALF3, I would not be too worried about the potential loss of business to Legend. An MOU doesn’t require any capital from Alcoa, and there is no great certainty that the plant will even get built.
Dr. Neal Wai Poi, whom many of you will remember from his work on “the bottom” of the pot - cathodes, silicon carbide, etc - is moving to Santiago Chile.
Neal joined Australian research group CSIRO (Commonwealth Scientific & Industrial Research Organisation) in 2009, where he became the Acting Director of the Light Metals section. It is CSIRO that is sending Neal to head up a new research centre in Chile.
The new research centre will be focusing on mining and minerals processing, and will be jointly funded by the Chilean government, as well as several mining companies such as BHP Billiton, Anglo American and Xstrata.
I first met Neal when he was working for Simonsen as their technical manager. That was back in the days when Simonsen were still trying to get international approval for the LIRR silicon carbide slabs. Neal later went to Rio Tinto Alcan in their research centre in Australia. Neal was a regular presenter at TMS.
I am not sure if he speaks Spanish, but will surely learn quickly in Santiago!
We at AZ China are delighted to announce the 3rd biennial International Aluminium Raw Materials Conference.
The conference will be held in Qingdao, May 22 to 24. Qingdao is a beautiful seaside city, about halfway between Beijing and Shanghai, and was the home of the Olympics Sailing events in 2008. It is also home to China’s most famous beer - Tsingtao. We are holding the conference at the Shangri La Hotel, easily Qingdao’s most beautiful hotel.
The theme of next year’s conference will be “Re-assessing the dragon”. After the highs and lows of the last 6 - 8 years, where to now for those of us who are trying negotiate with and succeed with China. How to include China in your raw materials strategy, without adding too much risk to your portfolio?
We are delighted to announce an impressive list of speakers, including His Excellency, the former Australian Ambassador to China, Dr Geoff Raby. Dr Raby’s PhD was in Economics, and he has plenty to say about China’s future. We also have invited Professor Patrick Chovanec, Associate Professor of Economics from Tsinghua University. Patrick did a great job for us in San Diego, and is quite outspoken about China’s economic health.
The conference website is now live, so for full details, including hotel information, sponsorship opportunities and conference pricing, please go to www.conference.az-china.com.
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