China

We have long reported on anti-dumping cases involving metal products. In fact, some of the cases we have covered the longest (over two years) have made some new news but not for the reasons that many of you will guess. Most anti-dumping cases that make the news involve the facts of a case¦.a group of producers, steel union workers or some other “harmed industry files an anti-dumping case claiming goods from a certain market or country have been “dumped. The ITC (International Trade Commission) investigates and some sort of duty or countervailing duty gets applied to a particular HTS code. The most recent newsworthy stories involving metals include OCTG and line pipe from China.

But now we have an entirely different issue coming to the fore and one that will surely heighten trade tensions. That issue involves the willful attempt on the part of overseas suppliers to transship or create other illicit means of moving goods ordinarily subject to these new countervailing or anti-dumping duties via a different manner to avoid the duties. According to this press release issued by The Coalition for Enforcement of Antidumping and Countervailing Duty Orders comprised of steel wire products, steel nails, steel wire garment hangers and uncovered mattress innerspring manufacturers, “These US industries have developed compelling evidence detailing how certain foreign manufacturers are evading duties. In some cases, they are shipping these products to the US via third countries and then falsely designating it as the country of origin to evade duties, a practice termed as “transshipment. In other cases, an inconsequential modification is made to the product in third countries to avoid the duties. In yet other situations, false labels displaying a different country of origin are placed on shipments of products actually made in China.

Having worked for a rogue trader in another life, I can dream up a variety of ways in which Chinese manufacturers could circumvent the ITC ruling. A trickier way to create such a scheme involves establishing a company in an export trade free zone (my personal favorite would be Singapore). Goods then ship from China to Singapore where the products likely undergo additional processing (this could be something as simple as oiling the innersprings), whereby the goods go through a re-packaging and labeling process when it leaves the country as “product of Singapore.”  This scenario sounds plausible.

According to Panjiva, a website with global sourcing tools which allow for trend spotting, the bulk of imports this past twelve months for uncovered innerspring units still came from China which would suggest these Chinese exporters did not seek to avoid the duty. But in all fairness, Panjiva data does suggest that China market share has declined while the market share for the Philippines and Canada has increased.

Powered by Panjiva Trends

In the above referenced chart, 182 shipments came from China, 8 came from the Philippines, 5 came from Canada and 3 came from Hong Kong. For the other products, according to Panjiva data, it appears to refute the claims made by the coalition. But please don’t take our word for it, check out Panjiva trends and type in “steel nails “steel wire or “carbon steel threaded rod and see for yourself!

–Lisa Reisman

Expect more tightening of lending limits in China after the Chinese New Year. The exact amount will be down to the extent that price rises are seen to be feeding through into the economy because the authorities greatest fear is that runaway levels of lending in December and the start of January are fueling, and reflective of, an unsustainable surge in investment much of it speculative.

According to a Reuters article, the official PMI reached a 20-month high in December while an index derived from a companion poll by HSBC scaled an all-time high in January. Beijing’s loan quota for all of 2010 is 7.5 trillion yuan but banks loaned 15% of it in the first two weeks of January alone. Fortunately, the authorities in a command economy have more direct means at their disposal than tweaking interest rates or reserve requirements. Following direct orders from on high, banks reigned in lending from 1.1tn ($161bn) in the first half of January to 1.45tn ($212bn) by the 19th of the month and 1.6tn (234bn) by the month end. With the Chinese New Year now imminent the banks and the markets can pause for breath before they return later in the month. If necessary the banks will be squeezed further by increasing reserve requirements again. The half point increase in required reserves that took effect on Jan. 18 locked up 300 billion yuan and at the same time initiated a much needed sell off in metals and equities arguably both had lost sight of fundamentals. Beijing is more likely to increase reserve requirements again than raise interest rates at this stage. Bank lending is the primary worry and many industries, particularly exports, are still struggling so raising interest rates above the current one year benchmark deposit rate of 2.25% is thought unlikely.

As we have mentioned before, the trick will be taking the steam out the asset bubbles without causing a crash. The current adjustments are in the right direction and so far at a manageable pace. The greater worry is less liquid markets such as property and speculative industrial production capacity; they take longer to build up and longer to slow down. The question is will banks make the decisions for speculators by restricting lending and starving markets of the oxygen they need to keep expanding. Clearly the government hopes so, and so should the rest of us, a healthy stable Chinese economy is in everyone’s interest.

–Stuart Burns

President Obama’s actions to reign in the activities of the banks and China’s increase in bank reserve requirements have had a sobering effect on the markets. Both equity and metal markets have come off their highs and made investors pause for thought. The approaching Chinese New Year is also casting a damper on the Asian markets as no one wants to build a position, one way or the other, prior to a prolonged holiday.

So an article in Mineweb this week written by Simon Hunt founder of metals analysts Brooke Hunt in the 1970’s and now owner of Simon Hunt Strategic Services makes sobering reading whether you agree with all his conclusions or not. The gist of the argument is that inflation is becoming a problem in China and because of China’s preeminent position driving demand in the post recessionary world, if China stumbles we all fall.

First, the inflation element. The article states that there has been an extraordinary rise in liquidity in China with outstanding loans rising by 32%, M1 (narrow measure of money supply) by 32% and M2 (broader measure of money supply) by 28% last year, about double the growth rates seen in 2007, the growth peak of the last cycle. Last year, every 1RMB growth in GDP required a lending increase of 5.3RMB against a historic average of closer to 1.3.   Input prices are rising for manufacturing the article says; export prices are being forced higher across many products by an average of 10% with effect from January this year. With the economy being actively driven towards personal consumption and with so much liquidity in the system it is no surprise the housing market is experiencing inflation. Real estate prices are soaring according to many private sector (but unnamed) sources with prices in Shanghai and Beijing increasing by over 60% last year and by 80% in Shenzhen in December versus a year ago. Even the governments’ own housing index is showing an increase of 7.8% nationally in December 2009. There seems a huge disconnect between these unnamed sources and the government index but even half way between the two is a scary number.

The second issue is how do the authorities manage to reduce this surplus without causing a crash? Clearly they see inflation as a problem too, hence the increase in bank reserve requirements intended to take liquidity out of the market in gentle steps. There will be more of these gradual tightening moves intended to slowly take the froth out of speculative bubbles such as the housing market and inventory building. Simon Hunts’ position is it won’t work. His prediction is he expects to see the Shanghai stock market beginning a sharp fall over the next two months, the size of which will surprise analysts, a fall which should last until around the autumn, one that should be deep and serious. Moreover, actions now likely to be taken by the Obama Administration to control the activities of US commercial banks could intensify the fall in markets, not just in China but globally.  A sharply falling stock market in China will have the impact of taking a lot of speculative money out of the system; business and consumer confidence will weaken; the economy will grow more slowly; and funds will be taken out of metal markets. For most of 2010, we should see stock and metal market prices falling.

We wouldn’t want to say it can’t happen. Simon Hunt has been through several recessions before and is one of the most experienced metals analysts in the market. We feel the projection is excessively gloomy and once the Chinese New Year is out the way the markets will recover from their current nervousness, but much will depend on the actions of administrators in Washington and Beijing over the next 3-4 months, and how driven to act they feel by the economic data being released.

–Stuart Burns

Aluminum Corporation of China (Chinalco), China’s leading aluminum producer has shifted its investment emphasis to copper according to reports in the Telegraph newspaper. The reason given for the move is copper holds greater development potential said company Vice-President Lu Youqing in an interview with Reuters.

Chinalco is no stranger to copper; the company owns 49% of the country’s fourth largest copper smelter Yunnan Copper via an unlisted subsidiary China Copper Company. Although there are currently no plans to float the subsidiary that is clearly an option down the line and we could see a Chincoco to match the current Chinalco. Chincoco was set up last year and already has assets worth more than 60bn Yuan ($8.8bn). Copper prices have surged by 130% since the start of 2009 against aluminum prices that have risen only 44%. The disparity in performance is largely down to supply and demand fundamentals. The copper market is running a small surplus, and the aluminum market is running a massive surplus – which has weighed on aluminum prices. The company already owns the $2.2 billion Toromocho copper mining project in Peru but has said they do not intend to build a smelter at the mine. Building work on the Toromocho project will start this year and the mine is expected to produce 210,000 tons of copper in concentrate annually from 2012 onwards. Chinalco has said the world’s copper smelters are already battling over capacity and so the company intends to bring the copper in concentrate from Peru to Yunnan’s facilities in China for refining.

Mr Lu was being typically cagey about Chinalco’s intentions, not discussing any details of potential targets in the copper market. But Ivanhoe Mines’ copper-gold project in Mongolia has been mooted as a potential target. The Chinese are well placed geographically and historically to make the most of Mongolian projects so Oyu Tolgoi would be an obvious target. Yunnan Copper recently signed a deal to take over a smelter in Inner Mongolia called Chifeng Jinfeng Copper Co.

Chinalco also said yesterday that it had posted a profit in the second half of 2009, compared with a loss in the first half of 2009. No profit figure was revealed, but the company’s full-year sales rose 10% to 142bn Yuan ($21bn). In December, capacity utilization at its aluminum operations exceeded 90%, with production costs falling 17% over the year although no details of how that breaks down in alumina and power costs appear to be available. Nevertheless the company is unlikely to look at new smelter projects within China in the short term, the government has made it clear it does not want to encourage further high energy consuming aluminum smelters when the market is already over supplied and meeting rising power demands is challenging.

–Stuart Burns

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Where is Nickel Going in 2010?

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Non-ferrous Metals

According to the LME, some 65% of nickel goes into making stainless steel so it is no surprise that three years of falling stainless demand have decimated nickel prices. What is more of a surprise is that as stainless steel mills continue to report poor sales and idled capacity the nickel price has been powering ahead in spite of rising inventory levels. This week Bloomberg reported that ThyssenKrupp, Germany’s biggest steelmaker, said in November it would cut stainless steel output by 25% in the first half of this year as weakening demand from car-makers and builders hits sales. Finland’s Outokumpu Oy, the world’s fourth- biggest stainless-steel maker, last month cut its fourth-quarter profit target, while Spain’s Acerinox is on a 50% capacity reduction for 2010. Not only are mills reporting generally poor stainless sales but producers are continuing the gradual migration from nickel containing 300 series grades to low or zero nickel containing 200 and 400 series grades. Just this week, Baoshan Steel, China’s largest steel producer and second largest stainless producer, announced it would reverse its 60/40 ratio of nickel containing to non nickel containing grades in an effort to boost profitability and cut costs.

So why should nickel prices be so strong when demand appears so weak? Well at the same time western demand has been falling, demand for stainless steel in China has been rising. Both Baoshan Steel and the country’s number one producer, Shanxi Taigang Stainless have said they intend to increase overall stainless production in 2010 to meet continuing strong domestic demand. So the reality is we have a market of two halves, weak in the west and strong in the east, or at least strong in China. How will this play out in 2010 and where will it drive nickel prices in the year ahead? Leave your details in the links below.

–Stuart Burns

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The question of China’s exchange rate against the US Dollar is one that excites opinions in even the most parochial backwater of the US or Europe because it is perceived to be a major cause of blue collar manufacturing job losses to the emerging market. So the growing probability, indeed near certainty, that China will revalue its currency this year is sure to stimulate considerable speculation as to when and by how much.

Because of China’s size in the global economy the issue has become of significant importance for almost all its trading partners, led by the US, Europe and Japan. There is an almost universal clamor to take action but the authorities have resolutely declined so far. Indeed just last month Wen Jiabao, China’s premier, said he would “absolutely not yield to pressure for a stronger Renminbi according to the Financial Times.

After revaluing the Renminbi by 2% and removing the peg from the dollar in mid-2005, China allowed its currency to appreciate by more than 20% against the dollar until July 2008. Then the dollar peg was put into place as China tried to insulate its export sector from the financial crisis. But China’s exports are rebounding again, with recent figures showing exports growing in December for the first time since October 2008. According to the Financial Times, on an annual basis Chinese exports rose 17.7%.

The debate is not so much if but how the authorities will allow a rate rise. A gradual move, over months or years, could tempt large inflows of speculative “hot money into China, inflating domestic assets prices including stocks and property. But a sudden one-off revaluation could be seen as more evidence of policy tightening by the People’s Bank of China, which would send shock waves around the world potentially impacting asset prices of all kinds.

The imperative to do something appears in part to be driven by the continuing rise of reserves undermining the authority’s claims that a change is not necessary. Data last week reported in the FT showed China’s foreign exchange reserves, rose by $127bn in the fourth quarter to $2,400bn. To maintain its exchange rate, the People’s Bank of China takes the excess inflow of foreign funds from the market and channels it into its foreign exchange reserve account. To sterilize, or mop up, this liquidity, the bank issues central bank bills, apparently this bill issuance has risen markedly since November suggesting the accumulation of reserves is accelerating and exports are rising strongly.

The main losers of a currency  appreciation would be China’s exporters but in terms of the authorities longer term objectives of stimulating consumption and controlling inflation a currency  adjustment has a lot to commend it. A stronger Renminbi would make imported goods  cheaper for ordinary Chinese and tend to reduce the cost of imported raw materials for industry lessening inflationary pressures.

The consensus seems to be action will be taken early in the second quarter and although the country favors gradualism a one off adjustment on balance probably carries less risks.

–Stuart Burns

The markets paused for thought when the Bank of China raised the requirement for big commercial banks to keep 16% of deposits at the central bank, up from 15.5% before. The impact was not so marked in China where the Shanghai Composite Index is off less than 1% this year but more in overseas markets which had been fooling themselves that China’s loose monetary stance would go on forever. As it is the monetary policy of last year is likely to drive consumer price inflation to 3% or more this year, the turnaround starting in October when it was at -0.5% to December which was at +0.6% according to the FT. Consumer demand, housing, foreign direct investment and bank lending are all still powering ahead. Raw material prices have doubled admittedly from low levels due to the financial crisis but they are still now back at what appear to be historically high levels. M1 money supply the narrow definition of money in circulation has gone stratospheric as this graph from the FT illustrates:

China M1 On a month-on-month annualized basis, the national property price index rose by 14% in December. Residential and commercial real estate prices rose at the fastest rate in 18 months in December, while foreign direct investment more than doubled from a year earlier according to another FT article. And still the banks are lending. The Rmb600bn of new loans in the first week of January was not far off the monthly average of Rmb800bn last year. The Bank of China has repeatedly rebuked any suggestion to raise the Renminbi exchange rate which would have the benefit of at least reducing raw material costs and easing some supply side inflationary pressure.

So the question appears to be not will inflation raise it’s head in China but how far and how fast. The OECD markets will also face the same problem but further down the road. Recovery has to pick up steam considerably before it will become an issue in Europe and the US but with so much capacity cut back in the west last year utilization levels are actually higher than one would expect for many materials. Steel for example is back to 70%+ and mill lead times are beginning to move out. That will result in gradually higher prices even if the long awaited re-stocking does not materialize in the short term.

–Stuart Burns

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I have to admit that I haven’t read one article on this whole Google showdown in China. I’m assuming we all agree it’s a showdown of sorts. But an article with a headline like this one “Why America and China Will Clash, just grabbed my attention. Whether one buys steel or aluminum, a zinc die-casting or a finished part from China, the relationship between the two countries forms the backbone of many of our posts (not to mention many of your businesses) and some of our behind-the-scenes research. You may have noticed I haven’t penned too many metals-only pieces these past few days, (with the exception of a molybdenum article I wrote last week). That’s because we have been spending our days writing our market forecasts and price predictions for the various metals many of you buy.

We look at dozens of reports, attend conferences, speak to contacts, conduct primary research, survey buying organizations, run spreadsheet models etc- all in an attempt to get our arms around metals markets and the myriad road signs for the metals covered on MetalMiner. And in nearly all of our research, we attempted to assess the Chinese economy analytically looking at risk, growth scenarios, projections, macro economic indicators etc. But this Google story suggested a far riskier scenario, one in which few if any of us have likely considered. In the Financial Times article, the author, Gideon Rachman suggests, “that the assumptions on which US policy to China have been based since the Tiananmen massacre of 1989 could be plain wrong.

The author goes on to suggest that the case against China will likely be made by labor activists, security hawks and politicians. But we see it also coming from various business sectors. The article goes on to suggest that President Obama may toughen up its China stance with, “an official decision to label China a “currency manipulator. Increasingly we have written about the case against China in the area of exchange rate setting. But make no mistake about it. The United States is caught in a classic Catch-22. We have this debt because we import more than we export (and we have for years now). Those dollars that flowed into China are funding our current stimulus and rescue plans. According to a webinar I recently attended, by 2015 over 34% of our GDP will go toward debt service. Our growth in recent years has been fueled by deficit spending.

I admire Google for pulling out of China. Now what we the masses do, and what we’ll do if the relationship turns icy, well, that’s an entirely different matter.

–Lisa Reisman

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The balance of power is shifting in the world of stainless steel. Before emerging markets began to heavily invest in stainless steel production Europe and Japan were the source for much of the world’s stainless supplies. As recently as 2008, Europe was still exporting 1.6 million tons of stainless steel. But the rise of emerging market production capacity has been relentless such that now Europe finds itself in a similar situation to Japan as it looses export markets and its domestic markets remain slow growing at best. Acerinox for example has reached agreement between management and its trade unions to facilitate production cuts of up to 50 percent through the whole of 2010, although just last week it said it may increase production in February to meet an uptick in orders from North Africa. Acerinox’s recent announcement that they would produce duplex grades is probably a reflection of the challenge the firm is finding competing in the commodity end of the stainless market.

The same process may now be happening to some of those emerging market sources, at least in Asia as Chinese output is crowding out its neighbors. China’s production has increased more than 22-fold in the last ten years and an article in azom quotes a  MEPS forecast that China’s stainless capacity will increase further over the next five years. This is likely to exceed any potential growth in domestic demand and lead to increased availability on the world market. Taiwanese producer, Tang Eng, has been forced to cut output in the last two months and South Korea’s Posco may restrict operations in January. Although growth in home demand should be sufficient for both countries to maintain their current capacities, in the future their export markets will be cramped by growing Chinese capacity.

India has grown rapidly over the last decade such that it is now ranked fifth in the world according to SK Roongta, chairman of Steel Authority of India Limited (SAIL). He is quoted as saying, “Going by the current growth trends  India is expected to be the second largest producer of stainless steel in 2015 after China. Chinese material has been dissuaded from entering the European market recently by pending anti dumping cases. Indian producers are calling for similar protection against low cost Chinese imports as even their production levels were hit in 2009.

Figures from the International Stainless Steel Forum (ISSF) reported in the Engineering News underlined the position. In 2007, global stainless steel output was 27.8 million tons, which decreased by 1.9 million tons in 2008 to 25.9 million tons. Excluding China, stainless steel production in Asia was five million tons in the first nine months of 2009, which was a year-on-year decline of 23%, owing to lower output in India and Japan, while production remained flat in Korea and Taiwan. Stainless production in China however was 6.6 million tons in the first nine months of 2009, an increase of 19.1% on the same period of 2008. The ISSF reported that China accounted for almost 37% of the world’s stainless production. At the end of the third quarter of 2008, China’s market share was just 26%.

–Stuart Burns

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There are many stories doing the rounds as to why the exploration license for Tethyan Copper Co (TCC), a joint venture between Canada’s Barrick Gold and Chilean copper miner Antofagasta, is likely to be revoked by the Pakistani Baluchistan provincial government this month. TCC has a 75% interest in the Reko Diq project a potential US$3bn copper and gold mine in the sprawling and largely lawless southwest state of Pakistan. The Baluchistan local government has the remaining 25%. The deposit is said to hold more than 27bn pounds of copper and 20 million ounces of gold according to an article in The Star although with the feasibility study still underway the figures are open to debate.

Barrick and Antofagasta agreed to buy into TCC in 2006 when they paid BHP US$ 200m for the exploration rights and are said to have since spent a further $200m on drilling and environmental assessments.

Shaukat Tarin, the Finance Minister, explained the governments’ case to the FT when he said, “We can’t continue with this project in its present form. We have to protect our key national interests,” Mr Tarin said ore extracted from the exploration site at Reko Diq would earn between $40bn-$50bn in raw copper exports in the next 25-30 years. “This is a tenth of what we could earn for Pakistan if the investor was to put in a processing plant to refine the copper and export it as a primary metal. Why should the investors take our raw material for processing to a third country and then make huge profits?” A senior official in the provincial government of Baluchistan said the export earnings could jump to $1,000bn in the next 25 to 30 years including earnings from gold and other precious minerals if the product was exported in the refined state.

Canadian diplomats are needless to say all over this case, making representations at national and local government levels. They have apparently been worried for months that Barrick’s exploration lease is in danger of being scuttled by Pakistani officials under pressure from the Chinese lobby. China is among Pakistan’s largest foreign investors and is financing the construction of a new commercial port in Gwadar, a coastal city near Pakistan’s border with Iran. China also operates a small copper mine close to Reko Diq.

The local government blames local feelings being spurred on by separatist guerrillas who have been fighting a low level insurgency for decades to rest control of gas and mineral resources. To be fair to the local population, when gas was discovered pipelines were promptly laid in and the gas piped off to other parts of Pakistan with nothing in return for the local communities. Local corruption is probably also involved in these machinations, one spokesman close to Barrick who has invested $1.5m in local schools and facilities is quoted as saying if a Chinese or Middle Eastern company comes in and takes this over, you know that they won’t be building schools or doing socially responsible projects there.

The local press see the unrest in the area as the result of interference by variously America, Russia, India, Iran and China well that’s spread around nicely then isn’t it? The reality probably is, as with much of Pakistan, a combination of tribal autonomy and decades of corrupt exploitation have made peoples distrustful of any outsiders and easy to stoke into separatist fervor.

Barrick’s position looks tenuous at the moment but they are experienced in dealing with such situations. The likelihood is some kind of deal will be reached which leaves local interests with a bigger slice of the pie. In the meantime such problems do not encourage other miners to invest hard earned dollars when they see what’s going on. This area of southwest Pakistan is rich in copper, gold, iron ore, chromites and potentially gem stones. With outside expertise and finance it could be transformed into a prosperous state, whether it will though looks increasingly unlikely.

–Stuart Burns

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