The chart below, from Westpac, shows the daily traded volume of Chinese iron ore futures on the Dalian Commodities Exchange back to when the market first came into existence in late 2013.
Day traders have reached a new speculative higher on Dalian iron ore. Source: Westpac.
It’s not the first time the Chinese market was swayed more by sentiment than reality.
What’s Really Going On?
Monitoring daily price movements in the domestic Chinese market (sign up for membership in our IndX if you would like to receive daily prices) gives MetalMiner the opportunity to keep a finger on the pulse of the country’s metals market, so when our editor, Jeff Yoders, remarked on the fluctuating daily prices for iron ore and coal on the Dalian exchange last week, we thought some of our readers may likewise by intrigued to know what is going on. Read more
Indeed, they are pumped out of the ground in a similar way. They come from the same or similar regions and formations and are extracted, processed and sold by many of the same firms. Both are intrinsically “energy” products and these similarities explain why most people expect them to behave similarly in relation to each other when it comes to price.
An LNG tanker in port. Source: Adobe Stock/pornsakamp.
But, in fact, the correlation is, historically, not close. For long periods of time, the correlation in price movements was little better than 25% but in periods of price spikes for crude oil, natural gas prices have also spiked bringing their aligned movements up to a 60-70% correlation.
Not Birds of a Feather
In reality, though, there is little reason why they should or would follow one another. Oil has been a freely traded and easily transported product making price arbitrage opportunities limited and tending to smooth out regional differences. Natural gas, on the other hand, is highly regional needing pipelines to transport it even modest distances of a few hundred kilometers and it needs to be converted into liquefied natural gas (LNG) to be transported globally. Read more
Not just in the U.S. but in many other countries where the technology is already well established and where the search for less polluting alternatives to coal has been picking up.
Nuclear may be thought of as yesterday’s technology, but its emission-less power generation makes it attractive. Source: Adobe Stock/mandritoiou.
Nuclear power still generates 19% of the electricity consumed in the U.S. and is arguably the most reliable base-load provider, not just for day-to-day supply but for decade-to-decade. Emitting zero carbon emissions during power generation (green lobbies would claim considerable CO2 is released during construction, not least of which comes from the amount of concrete involved in containment structures) nuclear power plants have been operating for nearly 50 years. Read more
It is not a secret that China’s phenomenal growth was achieved on the back of phenomenal levels of investment. In the latter part of the last century, and early part of this, that investment paid off with rapid growth and an unprecedented rise in living standards for hundreds of millions of people but, over the last ten years that, investment has shown progressively poorer levels of return and the country is now saddled with hugely indebted corporations, falling growth and banks with growing levels of unpaid loans. Loans that privately many admit will never be repaid.
We wrote this week about Bohai Steel Group and it’s likely default on part or all of its nearly $30 billion in debt. The Bohai Group is not alone as a recent article by Bloomberg explains.
China’s big corporate entities were already overstretched. According to Bloomberg, record corporate debt levels have left many firms struggling to meet their basic liabilities, with corporate insolvencies jumping by 25% in 2015, quoting Euler Hermes.
The trade credit insurer sees another 20% increase in Chinese bankruptcies this year, the most among 43 major markets. As major firms struggle to meet bank debts, their suppliers are being left even further behind. Read more
Falling steel prices last year were matched more or less by falling input costs as iron ore and coking coal prices collapsed but, even so, margins remained under intense pressure as the overall metric tonnage produced dropped for the first time in decades.
Chinese steel mills are under pressure to cut their debts. It’s inevitable that some will not survive. Source: Adobe Stock/zjk.
The position of steel companies differs depending on their cost of production, debt commitments and level of efficiency, but China’s steel sector as a whole lost money last year. According to the Financial Times, China’s biggest 101 steel companies, lost a combined 72 billion RMB ($11bn) in the first 10 months of 2015 but that doesn’t tell the whole story.
48, Mostly state-owned, enterprises bore the brunt of the losses, while the balance are mostly more-efficient private sector firms that managed to squeeze out a marginal profit. Since then, the situation has gotten worse in spite of a short-term rally in prices over recent weeks. Li-Gang Liu, chief economist focused on China at ANZ, was quoted in the Financial Times as saying that year-on-year steel output fell 12% in both December and early January, putting further pressure on steel mills’ cash flows. Read more
While we don’t doubt the commitment of both, the firm and its management to such ethical pursuits, Toyota’s stated vision for the future has as much to do with hard-headed realism. Toyota is reading the writing on the wall with its environmental motives. The auto industry is engaged in the greatest technological endeavor since the early development of the gasoline engine 100 years ago.
Pioneering the Prius
Toyota can be said to have led the way with the commercial development of gasoline-electric hybrid technology, in the face of considerable skepticism when the firm pioneered it with the Prius in 1997. Since then, Toyota now has its fourth incarnation of the class-leading hybrid and has delivered more than 8 million cars according to the Fincancial Times, with the Prius in all its versions accounting for nearly half of it’s domestic sales.
Toyota changed the game with the Prius, can it do so again with hydrogen fuel-cell cars? Source: Adobe Stock/6th Gear.
Automakers are being driven by both public sentiment and government regulation to play their part in dramatically reducing global carbon emissions. The industry recognizes this and is quietly pouring an immense amount of resources, money and talent into finding solutions. Read more
In spite of its shiny new ultra-low-cost joint venture primary smelter in Saudi Arabia, Alcoa’s other primary operations do not have a hope of competing in the long term with new players such as China’s Hongqiao Group, known in the industry as Shandong Weiqiao Aluminium & Electricity. Even with sweetheart local power deals negotiated with local utilities, states and even countries other legacy costs such as labor, pension, social contract rules and dated technology put older primary aluminum divisions like Alcoa’s under intense competition from the new kids on the block.
How are Chinese smelters making money? Source: Adobe Stock/Pavel Losevsky
Unlike Alcoa and UC Rusal, both world number ones in their day, Hongqiao is making a profit even in today’s depressed aluminum market. Hongqiao Group reported 2015 sales up 39% year-on-year to 4.12 million metric tons, surpassing Rusal at 3.6 million. In large part this is being achieved by the group investing heavily in both new smelters, captive power generation and downstream activities.
According to the South China Morning Post recently, Hongqiao invested 14 billion yuan last year, helping it to achieve its target of reaching just over 6 mmt of annual aluminum capacity by the end of 2016, from 5.19 mmt last year. It also plans to add up to four units of power generation, each of 330 megawatts. Read more
Few metals have confounded investors and market analysts more than nickel. Indonesia’s ban and a perceived high cost base to China’s nickel pig-iron market have, for some years, led many to believe a rise in prices was only just around the corner.
But Nickel prices have remained hugely depressed and stocks of refined metal have continued to rise. Nickel prices slumped to a 13-year low last month and still remain below levels last seen in 2008-09, according to the Wall Street Journal. In spite of prices being so low that virtually no producers are believed to be making money, capacity isn’t being closed fast enough to have any impact. At the heart of the problem is slowing demand in China as the below graph from the WSJ shows
According to the WSJ, stainless steel production in China is projected to show no growth until 2020, and, indeed, has been more or less flat, fluctuating either side of a line, for a number of years.
Part of the rationale for higher prices was lack of ore when Indonesia significantly reduced exports of unrefined metal, but China had been stockpiling ore for some time and when the crunch came simply switched to the Philippines for ore supply. Since then, refined imports have been substantial but Citi Corp. is quoted as saying “We believe a significant proportion of the 258,125 metric tons of refined nickel imported into China over the first 11 months of last year was used for collateral financing rather than real demand,” The Shanghai Futures Exchange’s rising stock levels support this, underlining the lack of end users, which an be easily read as stainless steel production demand.
China’s NPI producers have responded to both low nickel prices and soft demand from the domestic stainless steel market as imports of nickel ore contracted by 26.3% in 2015 and are down by around 9.6% year-over-year in 2016 so far. Read more
Japan is facing a challenge much of Europe and, in time, China, too, will face: a declining working age population. Japan, though, is further ahead than the rest of us and how they cope with it could provide some pointers for large parts of Europe that are struggling not just with aging populations but also stagnant economic growth.
In Europe high unemployment in some countries and free movement of labor have, for the time being, meant workers can move to fill jobs where they exist clouding the analysis, but in Japan’s closed economy the effects are more easily evaluated on a national level.
Demographic Time Bomb
Japan’s population is falling by around 300,000 people every year, and this rate is likely to increase based on current demographics. Its population of 126.6 million is projected to dip below the symbolic 100 million mark sometime around 2050. This raises the question whether — in the medium- to long-term — Japanese Prime Minister Shinzō Abe’s Abenomics strategy for inflation and growth will ever be successful.
Japan’s economy is facing a demographic time bomb. Source: Adobe Stock/lisheng.
It may create short-term improvements but how can it be sustainable over the medium- to longer-term if you have fewer and fewer workers every year? In such a situation, each worker needs to get more productive just for the economy to stand still. Read more
Looking at MetalMiner’s daily China metal prices, you could be excused for thinking that the country has turned a corner and demand is lifting off again. Steel prices have been picking up since the Lunar New Year holidays with increases in the double digits for some items.
The South China Morning Post confirms our findings, saying steel billet prices in Tangshan are up 15% in just three days with price increases across the board prompting some restocking in anticipation of further rises. The paper says the price rebound came in tandem with a clear policy message from Beijing that the government would increase fiscal spending and monetary easing to help boost growth.
Steel prices are increasing in China, but is it from real demand? Source Adobe Stock/Jovanning.
At the same time Reuters reports China’s copper imports have surged 50% in February compared to a year ago, to 420,000 metric tons. This follows on from 440,000 mt of refined anodes, alloys and semi-finished copper products in January. Nor is it a simple switch from concentrates to refined metal. Imports of raw material copper ores and concentrates in February nearly doubled from a year ago, jumping 92.1%, to 1.46 million mt, the second-highest after a record in December 2015. February ore imports were up 24.8% from January spurred by strong treatment and refining charges prompting Chinese smelters to boost orders for imports of copper concentrates in November and December with shipments arriving in the first quarter. Read more