Shock, horror – Flash PMI down

Written by Paul Adkins

The HSBC Flash PMI dropped to only 50.3, compared with 51.7 the previous month. This compares with a consensus forecast of 51.5. The news sent shock waves through equities and commodity markets.

While we at AZ China did not have a prediction for this month’s PMI, and while this result is lower than many expected, it fits perfectly with the narrative that we have been espousing the last few weeks.   China’s progress towards a GDP target of 7.5% will be difficult, with many bumps and potholes along the way. it is no sure bet that China will succeed.

There’s a couple of things to note about this result:

  • It’s still  in positive, expansion territory. And it’s only the Flash number, not the final number that comes out in 10 days time.
  • It’s just one data point in a sea of data points.  The fact that the market has reacted so glumly points to how nervous people are about whether the longed-for return to heady numbers is really with us or not.
  • As we predicted, aluminium buyers entered the market too early. Whether technical traders following a trend continuation off a support line, traders looking to make a buck, or physical consumers looking to protect themselves against rising prices, the market over-reacted a few weeks ago, just as it has over-reacted this morning.

Goodbye BHPB Aluminium, hello ?

Written by Paul Adkins

BHP Billiton has announced that it intends to package its aluminium, nickel and some other assets into a new company.

In a move that has been anticipated for more than a year, BHPB said that its Chief Financial Officer Graham Kerr would be CEO of the new company, which analysts say will have a net value of about US$12 billion. But the company stopped short of naming the new entity.

This is a good move for shareholders. Aluminium assets are set to become more valuable as the metal price rises over the coming years, and the plants such as Mozal and the alumina assets in Western Australia are well run.

It may even be good news for those of you who sell to BHPB’s aluminium smelters in South Africa.   You will have a new city to visit on your global business travels.   The new company’s head office is slated to be located in Perth, Australia.   One of the prettiest cities in the world, Perth is also one of the remotest.    i am picturing folk who maybe live in New York or New Orleans, who would just love to add a stop in Perth on the run between South Africa, Brisbane and Singapore…

Why not ask?

Written by Paul Adkins

One of the things that we really enjoy here at AZ China is when clients and readers of our blogs ask us for more information.

Sometimes it’s to clarify something we have written.   Sometimes it’s a new question, and sometimes it’s an extension of our thinking.   That last one goes along the lines of “If what you say is true, then won’t this happen?” Those are the especially good questions, because they really keep us on our toes.   But we enjoy receiving all feedback, because it tells us you are reading what we write, and our efforts are not in vain.

So why not ht us up with your questions.   It doesn’t have to be related to a recent blog post or report.   If you have a question related to aluminium, carbon, anodes, petcoke, cathodes, aluminium fluoride, anthracite, alumina, bauxite, or about China, ask us.  Want to know where to get the best price for master alloys or grain refiners?   Need an alternative supplier for safety gloves?   Want to know what the aluminium price will be in the year 2020?

Email us at enquiries@az-china.com, or call the office on +86 10 5907 0270. We really do enjoy hearing from you.

Downside risks on aluminium prices

Written by Paul Adkins

Editor’s note: This piece is by Richard Lu from our office. Richard was having problems accessing the blog, so I have posted it for him.

China’s aluminium price has performed well since the beginning of May and consolidated at RMB14,000/t in recent days. However, we think the excellent performance is at or near the ceiling.  This rally of aluminium prices is due to improved domestic demand and a stronger London price, but downside risks begin to show on both sides.

Even though most economic figures pointed a positive outlook for China in the 2nd half of 2014, especially when the government re-affirmed to release more targeted easing policies, both new loans and power consumption were down in July. These indicators are part of the famous “Li Keqiang index”, after China’s Premier said he watches these indicators more than GDP. Those two numbers plus negative PPI indicates that China’s manufacturing sector remains weak. We may see huge amounts of metal come into the market in coming weeks, with near 3Mtpa restarting and new commissioning capacity on top of the current production levels. There’s not enough demand to soak up all the metal,  and this will eventually turn the price down.

Additionally, the spread between SHFE 3-month and spot narrowed to RMB15/t today. Even though it doesn’t firmly indicate a downward movement, it still reflects how tight the spot market is at the moment. Therefore, we somewhat believe the market is overbought and some funds who have the same view may begin to build short positions.

On the other hand, Euro zone economy stagnated in the 2nd quarter while the improvement in the US remained unstable. Those fundamentally prevent the rally of the London price. Besides, the high premiums further deter the enthusiasm of consumer’s buying. The improved LME price plus high premium may induce some producers to restart idled capacity outside China. The narrow spread between LME 3-month and cash prices makes the financing deal to be unprofitable. Our estimation shows a -2% return if the investors continue to do so. Therefore, some metals will be untied when the contract expired and injected into the physical market. If all the above forces lead the market back to old days when effective supply exceeds the “strong” demand, London prices will accordingly fall below US$2000/t again.

Without the support of a continually improving LME, the Shanghai price will struggle to keep at its present level. And as those who bought metal in anticipation of improved demand start to realise their bet was wrong, metal will come back into the China market and the price will fall. Maybe not in August, but certainly in the coming weeks.

Brazil net short

Written by Paul Adkins

Brazil is set to join the growing list of countries that are net short of aluminium.

According to a Bloomberg story, Brazil’s production of aluminium in 2014 is set to drop to less than 1 million tons for the first time since 1990, compared with 1.3 million in 2013 and 1.66 million in 2008.

Meanwhile, the country has imported 117,000 tonnes of raw aluminium in the first half of 2014, an almost ninefold increase from a year earlier. Imports of alloys have tripled to 61,000 tonnes, while exports of primary aluminium totalled 167,401 during the period, down 29%. Brazils Aluminium Industry Association ABAL estimates that next year, the domestic industry will become a net importer for the first time since 1982.

Against this backdrop, it will be interesting to see whether Alcoa is tempted to restart the 147,000 tonnes of capacity it closed in Brazil last year.  Presently the company is selling the electricity it would otherwise have consumed.   I am not sure whether the plant is even capable of being restarted, as from memory I think that the plant is a Soderberg design (readers may correct me if I am wrong.) In any case, it may make more sense for Alcoa to be an importer rather than a producer.   Why restart an old plant – Soderberg or not – and run at high cost, when Alcoa can just as easily supply metal from Ma’aden, one of the world’s lowest-cost plants, and enjoy the super=high premiums to boot.

In fact, this is likely to be a part of a longer-term global shift.   In the fullness of time, we are more likely to see centres of aluminium production supply networks around the world, while the list of countries that are net short of aluminium capacity continues to grow.   Regional powerhouses such as the Middle East and Russia and China will become increasingly important to the world, an emerging new strategic risk to the global economy.

 

No plans to lift ban: Indonesia

Written by Paul Adkins

Indonesia has no plans to lift the bans on exporting unprocessed ores, according to the country’s chief economic government minister.

The ban on unprocessed ores, including bauxite, has been in place since mid-January.   Indonesia is seeking to gain the value-add economic gain from the capital investment in new refineries and smelters, and the ongoing revenue from export of processed ores, such as alumina.   There had been some speculation that the ban would be watered down, especially in light of some exemptions being granted to some copper and gold miners. That speculation was boosted by the election of a new President who takes office in October.   With a ticket of being pro-business and pro-economic reform, some commentators thought that the ban might be shunted to some time in the future.

But this week’s announcement has poured water on this speculation, with good reason. Any sign of weakness in the ranks among Indonesia’s leadership would only delay the investment they want to attract.   Investors on the other hand will quickly hold off making commitments if they can obtain the ore without having to invest in new refining capacity.

Abu Dhabi meeting

Written by Paul Adkins

I will be in Abu Dhabi September 22 – 24, staying at the Ritz Carlton Hotel, in case anyone is interested in having a meeting with me.   If so, please contact my assistant Andrea at andrea.wu@az-china.com.

Note, I am not attending the MB conference – too expensive.

 

Please help us to grow it!

Written by Richard Lu

Do you remember the AZ China CPC Index? Well, we’ve recently updated it to include June shipments data and we hope this will be helpful for you and will provide better information regarding the global CPC market. It’s now been over 1 year since we officially started this index, so the value of the information is growing every month.

Based on the data we’ve collected, it appears that Chinese anode grade CPC FOB price is falling gradually. The weighted average price in June has been under US$320/t, down 9% compared to the same period last year.

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On the other hand, the export volume shrank greatly in the first half of 2014. As a guide, if we were to simply double the data numbers of the first half year so far, we would see that the export volume in 2014 will not exceed 1 million.

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We believe the fall of both volume and price is due to the closure of high cost smelting capacity outside China. Therefore, along with the rally of LME aluminium prices, smelters will almost certainly run at a higher rate, which indicates an improving CPC demand. In fact, the same thing has happened in China as well, so it’s fair to say that the Chinese CPC market in the 2nd half will be most likely be tight.

To get a better price, we would encourage you to have a reliable tool to price the products. We believe our AZ China CPC Index is an invaluable asset for you.

We periodically update the historical data for our subscribers to assess the general trend, but the real power of this tool is to provide you with in-time market data  running on a live basis. It would be very helpful to assist in pricing the CPC fairly for both buyers and sellers, and could greatly offset the volatility risk.

Therefore we are hoping for your help to grow this index. Your generous addition of data would be highly appreciated and please do let your partners know about this index too. The more people that join in this program, the more precise the data will be. Besides helping us by sharing your data, your comments and suggestions are also highly welcome, so please do not hesitate to contact us if you have any question on using this index.

Please click here to enjoy our current index for free!

Datang divests assets

Written by Paul Adkins

China energy company Datang International Power Generation Pty Ltd (Datang) was in the news recently.   It has sold off its coal-to-gas facility to a Government-owned “sump company” – a company set up by Beijing to house troublesome assets.

Datang is the company presently developing the process of extracting alumina from coal ash.   It is worrying to hear that the major play in Datang’s development strategy is under so much pressure.   According to Caixin, a China-based financial media company, Datang couldn’t get rid of the CtG facility quick enough.   The plant had used the cheapest technology, but one which failed to take into account the traits and properties of the coal being used. As well, the amount of water consumed in the process was beyond what was allowed in the local government charter.   Datang staff from power stations were brought in to run the plant, but these people had no experience in a chemical-based operation. The plant is running at one-third capacity.

If this is the performance Datang can achieve on its flagship project, it bodes ill for projects like the coal ash plants.   Datang has published very little about performance or financial results for its coal ash plants.

 

Indonesia ore export ban begins to hurt

Written by Paul Adkins

The first real pain caused by Indonesia’s ban on the export of ores is beginning to show itself.

But not in China.

Indonesia’s GDP grew by 5.1% in the second quarter compared to a year ago, compared to 5.2% in Q1.   Indonesian economists and commentators say the slowdown was caused by slowing investment and the ban on ore exports.

The announcement of a slight slowdown in economic growth comes at a critical time.   Indonesia will have a new President come October, and incoming President-elect Joko Widodo won office on a ticket of reforming economic growth. It remains to be seen if his program includes any further loosening of the restrictions on ore exports.   There has already been a couple of changes to the rules, surrounding copper. At this early stage, it is more likely the incoming government will focus on wooing investors. Such a move would help improve the capital formation aspect of GDP, and bring new ore processing plants into the market, allowing the country to reap the value-add benefits.

But that vision needs to survive any further attacks caused by sagging near-term economic indicators.