Earlier this week we presented a couple of points of view regarding the role of urbanization in China and how that trend relates to growth of aluminum end use markets. In that post we cited three speakers from the recent 3rd Annual Harbor Aluminum Conference here in Chicago. Two of the speakers we covered and today we’ll endeavor to cover the third, the host presenter, Jorge Vasquez of Harbor Aluminum. For those of you who have never seen or heard Jorge speak, I have to tell you, he is quite a speaker. I have not seen anyone conduct the type of technical analysis that Jorge conducts. That isn’t to say that we agree with all of his findings but if anyone has sliced and diced the aluminum market, it’s Jorge. Jorge points to the notion of resiliency within the Chinese market to help explain that country’s growth story. He cites a variety of indicators from plain old strong domestic growth to a central government that acts swiftly and doesn’t “dither [our words, not Jorge’s]. In addition, he points to a high household savings rate of 40%, low public debt levels (despite the story we ran yesterday to the contrary), the fact that China remains a net external creditor and China’s huge international reserves.
All of these factors, Jorge believes, have allowed China to remain strong. In addition, and perhaps most controversially, Jorge takes an alternative point of view when it comes to China’s housing bubble. In particular, he believes that rising home prices in China are due to sales (not housing starts) and that China has put in place a number of measures to curb the speculative aspects of the housing bubble. He specifically cites the fact that banks have been banned from providing loans to speculative developers (those holding back sales of apartments in the hopes of waiting for higher prices or hoarding land), a new 5.5% tax has been levied on a buyer if a house was sold within the last five years, the announcement of a prohibition of banks providing loans for third home purchases and a couple of other measures designed to curb speculative behavior within the housing market. Jorge believes these measures have all lead to a bear property market in Shanghai since last year. He goes on to suggest that China has in fact chosen to pursue a path of more sustainable, moderate growth and the data seems to support that conclusion.
So what does Jorge conclude about China’s aluminum market? He summarizes three trends as follows: the first is that China is a net importer of raw materials and scrap. The second trend is that China is more or less balanced in primary aluminum despite astronomical output growth rates and China has become a net exporter of downstream products (e.g. bars, rods, profiles, wires, tubes, pipes, sheet, plate, strips and foil). He also points out that China remains one of the highest cost producers of primary aluminum at $2300/ton primarily due to China’s energy dependence but also the revaluation of the RMB. That cost structure creates difficulties for China to compete in primaries on the global stage. The Chinese government has put in place a range of export tax VAT schemes to promote the exports of semis. These include full 13% VAT rebates on tubes and pipe and foil and an 11% VAT rebate on plate, sheet and strip. These rebates neutralize any taxes, thereby giving China producers a leg up in export markets.
In sum according to Jorge, China appears to be moderating growth, promoting semi exports (and will gain market share), will continue to urbanize and drive up commodity prices and will remain a bullish factor on the LME.