Monthly Archives: August 2012
China’s official Purchasing Manager’s Index (PMI) came in at 49.2 in today’s announcement.
This means that even according to the official figures, China’s secondary industry is in contraction. Last month, the number barely stretched over the mid point, scoring 50.1.
The key question is, will China launch some form of new stimulus measure to revive the economy. We think the answer is no, for a couple of reasons.
Beijing has already been promoting economic recovery, through the acceleration of infrastructure projects and the freeing up of capital for investment. More than likely, the government will wait and see the impact of the measures it has already taken before launching any new ones.
As well, we are now just weeks away from the announcement of the new leadership team. It would have to be a major downturn or economic surprise for the outgoing leadership to take action now.
And in any case, where would the money come from, and how would it not re-fuel inflation and increase bad debt levels? China is feeling the pain of huge bad debts incurred as a result of the previous stimulus package, and although it has large reserves, it now also has substantial debts and legacies which need to be taken care of.
It is also worth remembering that PMI is a monthly number, and is likely to be seen as one data point in a sea of economic information.
Of course, what we think China is likely to do, or should do or not do, may have no relationship with what actually happens. Governments tend to take action when we least expect it.
Yes, I know we keep saying this, but it’s true again this week.
China’s Nonferrous Industry Association has published their July production number. According to the CNIA, July came in at 1.67 million tonnes, for a 4% reduction on June. Their figures are virtually the same as the National Bureau of Statistics.
The trouble with this figure starts to emerge when you look at the numbers by province. According to the official statistics, the reduction occurred in two provinces - Guangxi and Qinghai.
But these two provinces are the last places where a reduction will occur. Guangxi local government has been providing a power price subsidy for the last 2 months, causing the Xinfa smelter there to restart capacity. And Qinghai province is home to some big new smelters that are still going through their ramp ups.
It is always dangerous to accept official Chinese data as gospel, and especially dangerous when looking at individual months. July’s production number has been lower than June in 4 of the last 5 years, with only 2009 going against this trend (when the industry was ramping up as the market improved.)
Dow Jones and other news services are running the story this morning about the new smelter that started operations this month. According to Dow Jones, the smelter is the largest single line plant in the world.
The plant, called Qiya, is based in Xinjiang, and is owned by a private company. It has 320 pots in a single line, producing 450,000t per year.
But what Dow Jones and others missed in the story is the really interesting part. The plant is designed to run at 530KA. That’s 530,000 amps. And the plant has not been designed by SAMI, GAMI, NEUI, Pechiney/Alcan, Alcoa, Dubal, Hydro or any other company known for potline design.
This plant was designed by little-known Hunan Zhongda Metallurgical Design Ltd. To our knowledge, this is their first potline design. And they have started where other companies in the world are stretching to reach. They have started with a plant that breaks the 500KA barrier.
Not only that, they built this monster in a little over 18 months. Compare that with the RTA Jonquiere 600KA plant.
In a country where plants of 450,000t are plentiful, and where there are more than 130 smelters, this is an astounding achievement. Much more important than the fact that yet more aluminium is entering the market.
Late update: I was interviewed by a kid from the Wall St Journal about this smelter. Unfortunately he had no idea about aluminium smelting, and had a pre-set outcome in mind. So if you see an article by WSJ/Business Insider/Dow Jones that quotes me, check with me first before drawing conclusions. That’s one reporter I won’t be bothering to speak to again.
There has been a lot of conjecture about China’s aluminium industry, and its place in the hierarchy of China’s scarce resources, environmental challenges, and the allocation of capital into new projects beyond what is needed for normal market operations. Equally, at a market level, people point to the mis-match between smelting costs here and overseas, and the arbitrage between Shanghai and London, accusing China of over-producing at a high cost base.
But a meeting that took place in Beijing on Saturday put a new perspective on this debate. The meeting did not look at any of these questions, rather, it addressed the need for aluminium in China’s future economic development. A variety of topics were addressed, such as the rollout of the high-speed train system, the development of lightweight freight wagons for heavy vehicles and freight trains, and the application of the metal into housing and construction.
Sounds like a pretty normal conference, right? Yes, but you would be wrong. This meeting was called by the China State Council - the equivalent of the Cabinet. The meeting was presided over by Vice Premier Ma Kai, and in attendance were Ministers and Vice Ministers from several government departments. The papers were given by the National Development and Reform Council (NDRC), the most important government department there is when it comes to China’s economy.
And 350 people attended. including all the past presidents of the CNIA, including one gentleman who is 95 years old.
One thing about China - often the message isn’t in the words, but in the actions and the settings around the words. Just as the day decades ago when Chairman Mao took his famous swim in the Yangtze river.
And the message is clear. The government’s agenda is not about corporate life saving, P&L’s, share prices, market prices and so on. And while some parts of the Chinese government are focused on environmental regulation and resource management, the reading I take from such a summit is that aluminium is seen as being much more strategic than we sometimes realise. Why else would the State Council get involved? Why else would you attract a vice-Premier to the meeting?
The implications for our understanding of the China aluminium market are profound. At an extreme, such a mindset may well accommodate a view that the industry should be nationalised, rather than let such a strategic sector suffer from market forces. If not nationalised, then certainly one could envisage the government taking more steps to keep the industry at a “not too much/not too little” level. Let’s not over-capitalise, but equally, let’s not let smelters close due to unprofitable operations. Share buy-backs, no-interest loans to SOE’s, debt forgiveness, subsidies, export rebates - the list is extensive.
It remains to be seen whether this meeting was window dressing or was of substance. My sources tell me it was both - while there was some chest beating (which is par for the course in Chinese meetings), the NDRC and others had serious and real plans for the application of the light metal in their plans to build a modern China.
A few months ago, we published a story from a local news company, about an incident in South China with red mud breaking through retainer walls and flooding several houses in a nearby village. Here is the link to that story.
Today somebody pointed out to me that the incident did not involved red mud, that insidious by-product of alumina refining. The mud that spilt came from another process, not related to alumina refining.
I am told some people are calling for action on red mud production based on the incident in China. While a solution for red mud is a good thing, it it can’t be based on this incident.
UC Rusal has today announced a cut in their aluminium production, as a result of the “continued cloudy outlook” for the world economy.
That’s the “good” news. But their press release goes on to say that the cut will be 150,000 tonnes by the end of this year, growing to 275,000t by 2018.
Yes, that’s right folks. 5 years to reduce 125,000, or about 25,000t per year, which gives us a whole new definition of “capacity creep”.
Rusal had been talking about cutting somewhere between 300,000t and 600,000t. A cut of half to a quarter of the mooted volume reads to me like an invitation to the rest of the industry - “We aren’t going to take all the pain - you guys have to join us.”
It remains to be seen if Rusal will be on their own. Nobody else had even been talking about taking capacity cuts, with the exception of Alcoa. But Alcoa deferred the decision on their Italian smelter, and got a government package over 2 years for their Point Henry smelter. Rio ostracized their Australasian assets into Pacific Aluminium, who no doubt will be very reluctant to shut any more capacity past their NZ smelter. Meanwhile RTA themselves have now restarted operations in Canada. So amongst the big players, it is hard to see who could join Rusal, even if they wanted to.
The pet coke market in India is getting uglier.
Indian Oil Company (IOC) had announced that it was ceasing sales of pet coke, and forcing market participants to enter into an e-auction system. Buyers objected privately and publicly, with Maniyar Group calling in the lawyers. They sought an injunction to prevent IOC from going ahead with their plans. Rain CII also sought to have the plans shelved, though they kept the lawyers out of it.
IOC’s response to the market nervousness did nothing to settle the fur. They announced a new floor price for bids, with the floor price well above the price they had been achieving prior to the e-auction announcement.
But now comes news that Maniyar’s move for an injunction has been successful. A one-month stay of execution was declared on Wednesday night.
That forced IOC to suspend their e-auction, which had been slated for yesterday (Friday August 24.)
No word yet on whether IOC will appeal the injunction. Nor is there any clear indication as to what other actions players on either side might take.
One thing is sure though - Chinese traders are booking flights to India, looking to sell coke into the vacuum caused by IOC and their e-auction plans.
I am told that is how folk from north east USA describe themselves when they are very happy. It is how Stuart Ehrenreich decribed himself when describing his new life outside Alcoa.
Stuart, who was Alcoa’s Green Coke guru, left them recently, to hang up his own shingle. Stuart told me he thought he would do some trading, and a little consulting once he had gone out on his own, but has wound up being much busier than he expected. He is involved in several consulting projects already.
Stuart plans to focus on China and Asia, looking at Petcoke, foundry and metallurgical coke, coal, anthracite and several other commodities. With a brief like that, he will be very busy.
The rumor here in China had been that Stuart had retired, but Stuart made it clear that was never the plan.
We wish Stuart every success in his newventure.
Contact Stu at stuart.Ehrenreich@Cascade-Resources.com
We just finished another monthly session with Thomson Reuters. They offer an online forum for base metals, a special service where traders, bankers and analysts can log in to gain instant access to the latest news, trends and opinions.
As a regular guest in their base metals forum, AZ China answers questions about what is happening inside the China aluminium market. In today’s session we covered subsidies, how much farther the metal price was going fall (and as a result the possibility of closures), an update on capacity expansions, invisible inventory, China’s long-term strategy in terms of Indonesia’s export changes, and production trends.
AZ China is delighted to be able to offer this additional service in conjunction with Thomson Reuters. Join the discussion next month via the Base Metals Forum. For more information, email sapna.pajpani@thomsonreuters.com
With the Communist Party’s Central Committee meeting and plenum due in just a few weeks time, today’s Flash PMI announcement is a possible sign that all will not be in order when the new leadership is announced.
August’s figure came in at 47.8, signalling a steep contraction in industry. This is well down on July’s 49.3. Worse still, the sub-index for export orders fell to 44.7, from 46.7 in July, while the employment sub-index also reflected contracting conditions, at 47.7.
After 10 years at the helm of the ship of state, Wen Jiabao should be steering the economy at least towards a safe harbour. I am not sure what happened when WenJiabao took over 10 years ago, but it’s a safe bet that the government is probably using up a lot of band-aids and chewing gum, holding the ship together until they end their shift and pass the baton to the new leadership. It will be up to the new leadership to reveal all the bad news, free as they will be to blame the previous administration. After all, that’s what all incoming governments do - get all the horror stories out as soon as possible so you can stick it all to the previous incumbents, then slowly build the good news, to enhance your own position.
And that’s what worries me most about today’s flash PMI. It’s published by the folks at HSBC, not by the official Chinese sources. I suspect we will see the greatest divergence between this number and the one the comes out in a little over a week, from the NBS. Now more than ever, the Chinese government is unlikely to publish bad news.
The red carpet will soon be rolled out for Xi Jinping and Li Keqiang, and the last thing anyone will want to see on that red carpet will be blood stains of a sick economy.
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