Category Archives: Uncategorized

Glencore’s Chinalco talks – Poor timing

Written by Paul Adkins

The directors of China’s Chinalco must be wishing for better timing. They have Glencore knocking on their door wanting to talk about Rio Tinto, just at a time when all their attention is turned to the question of corruption.

Glencore has let it be known that they approached Rio Tinto with a suggestion about a takeover about 3 months ago, but got rejected. They have now let it be known that they have approached Chinalco, who hold 9% of Rio Tinto, for further discussions.

But how accommodating were the Chinalco Board? They have just lost their President, Sun Zhouxue to a corruption campaign.   One thing about corruption investigations in China – it never stops at one. Consider the recent clearing of the ranks at CNPC PetroChina, where more than a handful of senior execs resigned or were arrested after its President was taken down for corruption. So the folks sitting around the table in Beijing will likely be doubly cautious when it comes to talking with foreigners about investment opportunities.

I understand that the company has set up a small working party to evaluate its options.

Chinalco being a State Owned Enterprise (SOE), it is certain that any decision will be passed upstairs to its political masters before any action is taken. The Chinese government’s priority will be on resource security and outbound investment, but also on risk management. RT is not only a partner to Chinalco in deals such as Simandou in Guinea, it is also one of the big suppliers of iron ore to China. Beijing will be keen to protect and enhance its access to iron ore at lowest costs. It will also want to understand how having Glencore in the mix would change the picture and whether there would be increased risks to prices or supply.

But there’s one thing we can count on – Glencore won’t have raised the subject with RT or with Chinalco if they didn’t think they could win – eventually. There’s a playbook in the Glencore boardroom that will contain many more plays than what we have seen yet.

HK: fizzle ending?

Written by Paul Adkins

The protests in Hong Kong have now entered their 6th day, with numbers down on what we saw in the first few days of the week. And it appears that Beijing’s response is going to be that quintessential Chinese tradition – non-agressive slow burn out.

Anyone who has played the Chinese game of “Go” knows that the way to win is not always about brute aggression. Sometimes it’s best to take a more circuitous route. And anyone who has negotiated with the Chinese knows that patience is a skill that must be consumed in great measure.

And so it seems with Beijing’s response to the protests in Hong Kong. Beijing was never going to back down, and forcing CY Leung would have appeared to be a back-down. Sending in the troops against a group of people who are armed with nothing more than umbrellas would risk drawing all sorts of repercussions. (Not that Beijing cares terribly much what foreign powers might think – after all, Beijing blames foreigners for the troubles in the first place.)

So the best response is not to respond at all. Allow the passion to fizzle out.   Let the students go hungry, miss classes, use toilet facilities that must be in terrible condition by now, and sleep on the road. Soon enough the ardour will cool. To help that along, offer them some talks with the local authorities. Talks are good, because they separate the leaders from the throng, and those talks can last for days.

And at the end of the day, it teaches those students a valuable lesson (in Beijing’s eyes): you can protest all you want, but nothing will change.

As for the protestors, they have few if any new options. They can turn violent, but that will risk alienating the world and many of their number, and would bring about uncontrollable reactions that have no bearing on their real agenda. They can continue the present pattern, but interest will eventually wane, and numbers will shrink to a more easily controlled number.  Or they can seek a crumb of agreement from talks with authorities – like a modern-day loaves and fishes act, they can may be able to get enough concessions to feed the thousands.

The good thing is that the danger of an armed response appears to have passed. The bad thing is that a week of protesting has achieved not one single meaningful change to the relentless path that Beijing is following.

 

CPC-X back up and running

Written by Paul Adkins

We recently had a bug get into the CPC-X function on our website.  This has now been fixed, and you should be able to enter the site.

Contact us if you have any problems accessing the site.

CPC-X is AZ China’s independent index on Calcined Coke prices.   By strictly ensuring that both buyer and seller confirm the price, we are able to provide a tool that allows the market to set a price in good faith.

The index breaks calcined coke into 5 different categories. Within each category, users can still negotiate a premium/discount for the differences between the coke category and their cargo. We also define by region, to allow for any regional differences.   For more information on how to use the AZ China CPC-X, contact us at blackchina@az-china.com.

 

Golden Week

Written by Paul Adkins

AZ China’s offices will be closed for one week commencing tomorrow, as China celebrates the October 1949 revolution that put the Communist Party in power. The holiday lasts a week on the mainland, though only 2 days in Hong Kong.

We will continue to report on the market and industry via this blog.

The office will re-open October 8.

 

 

Easy come, easy go

Written by Paul Adkins

Markets were pleasantly surprised 9 days ago when the HSBC Flash PMI came in at 50.5. That result was better than the consensus forecast of 50.0, and a little better than August’s level of 50.2.

Any score above 50 represents growth.

But this morning’s announcement from HSBC took that little fillip away.   The final number for September has been declared as 50.2, the same as August.

According to the HSBC announcement, new orders and factory output were both revised down from the flash reading, with the one bright spot being that new export orders were up.

While it’s still an expansionary number, markets have been looking for signs that the bad news of the last few weeks was a temporary phenomenon, not part of a general slowdown in China’s economy. This morning’s number does nothing to encourage markets and nothing to suggest that some sort of government intervention will happen soon.

 

HK: Why “umbrella revolution” is a bad idea

Written by Paul Adkins

The iconic photo of a single man holding up an umbrella in a sea of tear gas is likely to go into the pages of photojournalism history. And the slogan that has risen from the throng of Hong Kong protestors, of “Umbrella Revolution” has a nice ring to it.

umbrella

 

 

 

 

 

 

 

 

Umbrellas served as a flimsy defence in the tear gas and pepper spray responses from HK police on Sunday, but a better defence against HK’s fierce midday heat on Monday. Umbrellas are a simple yet effective symbol for a demonstration – multi-coloured yet with the same purpose.

To the eyes of those in power in Beijing, it’s not a long jump to be reminded of the colour uprisings in the Arab Spring. For centuries, colours have been a powerful symbol and rallying point for protestors, and the fact that HK’s umbrellas are multi-coloured makes no difference.

But the real problem is in the second word. The protests so far have been about rejecting Beijing’s plans for the 2017 election of a new Chief Executive for the island.   That’s a protest, not a revolution. It’s likely that there are numerous other grievances bubbling under the surface, some related to the main point, some in relation to Beijing’s governance overall, some totally unrelated to the pursuit of democracy. But if the protest leaders allow the agenda to be broadened into a wider framework more closely aligned to revolution than to protest, Beijing’s reaction is likely to be much more severe.

As it is, Beijing has few options.   It could quietly seek the present Chief Executive’s resignation – CY Leung is unpopular on the island. It could send in reinforcements to bolster the HK police and its military presence on the island, said to be about 6000 troops. Or it could take a conciliatory approach, setting up discussions that cause the protestors to go home but which run for months with no progress. (Such an approach was used a couple of years ago when similar protests took place in Southern China, with the discussions on reform achieving nothing. HK is not likely to be fooled by that approach, and any new protest is only likely to be more strident.) One thing is for sure – Beijing will not back down or reverse its decisions.   Beijing cannot afford to send messages to Taiwan, Xinjiang, Tibet and other restive groups that if you push hard enough you will get your way.

President Xi Jinping has already shown his credentials in his primary role as defender and promoter of the Communist Party. He has brought down an ongoing campaign against corruption within the party, and brought the PLA into alignment by replacing some generals. The language of compromise and consideration has not been part of his rhetoric since he took power, so it’s unlikely we will see that sort of reaction in HK.

Many commentators have been jumping to comparisons with the 1989 Tiananmen Square protests, and they way they were dealt with.   Perhaps a more current comparison is to look to Urumqi. The Party’s reactions in places like Xinjiang are a grim reminder of what could happen. Of course, HK is completely different to Urumqi. HK has the advantage of being an international financial centre and hub for multi-national corporations. It is an important trade link for imports and exports. But Xinjiang has vast reserves of coal and is an important strategic outpost protecting China’s western front. In that respect, HK and Xinjiang are similar. They have strategic and commercial value to Beijing.

Perhaps the most important difference is that in Xinjiang, the protestors are Uighur, seeking religious freedom amongst other things. In HK, the protestors are Chinese, seeking freedoms that go directly against the Communist Party’s model, a more unpalatable fact for Beijing.

Let’s hope the protestors stay on message, that it’s a protest, not a revolution. For the sake of their safety.

Tomorrow is a key test date – October 1 is the anniversary of the Communists taking over China in 1949.

 

HK: This is serious

Written by Paul Adkins

The international press has yet to catch up with the goings-on in Hong Kong, but the potential for a major push back by Beijing is becoming a serious threat.

Thousands of students and locals demonstrated in Hong Kong yesterday, blocking parts of the Central Business District. They are protesting against Beijing’s watering down of the agreement signed when Britain handed its former colony back to the Chinese. Beijing’s mantra at the time was “One Country, Two Systems”, but recent announcements and policy directives have removed much of what had previously been agreed to, angering many Hong Kongers.

Yesterday’s protests were not the first, but they appear to be the biggest. As of this morning, much of the central business district is still blocked. Hong Kong police have been using pepper spray and tear gas and arresting protestors, amid chants of “Police are Hong Kongers too”. But the response from the local authorities has been tepid.

It’s easy to rush to comparisons of the 1989 protests in Beijing. Protestors calling for democratic reform, wavering reactions from local authorities, a groundswell of optimism and determination among the protestors.  In 1989, we did not have the level of internet access and social networking that we have today, and Hong Kong is much more of an international hub than what Beijing was 25 years ago. But we have a hard man in Xi Jinping in power in Beijing, a man who is currently spearheading a campaign on corruption in the ranks of the Communist Party. He has just completed a reshuffle of senior appointments in the PLA, meaning he has more people in key military positions who owe their allegiance to him.

This morning the students and protestors managed to get to one of the China national flags on one of the major buildings, and turned the flag upside down. It’s a symbolic finger-gesture to Beijing. It’s impossible to say how Beijing will react, but the fear is that  when Beijing acts to close the protests down, it will be a total and complete shutdown of much more than the voices of these students and protestors.

For mine, I would be avoiding the Central/Admiralty areas of HK, and staying away from the island altogether if possible. Unfolding history is rarely a bloodless process.

 

Petcoke import ban one step closer

Written by Paul Adkins

In an announcement that is sure to send shivers through the petcoke trading community, China has announced a ban on the import of coal with sulphur levels above 3%.

The new rules, which come into force in January, will have a 3-tier structure of restrictions.   Level 1 bans coastal cities from importing coal having sulphur levels above 1% and ash levels above 20%.   Level 2 bans the transport of coal over 6ookms if the coal has a calorific value of less than 3940kCal/KG, or has sulphur exceeding 1% or ash at 20%.

Level 3 applies a total ban on any coal having ash at 40% and sulphur at 3%.

These moves are part of the government’s push against pollution. Analysts say that Australian coal is likely to be the hardest hit, because of slightly higher ash content.

But it seems to me that it is just a matter of time before similar rules are announced for the import of high sulphur petcoke.   China imported just over 8 million tonnes of this category petcoke in 2013, and there had been rumours this time last year that a ban was imminent.   At that time some entrepreneurs rushed out and bought inventory hoping to capitalise on the supposed ban. But the ban didn’t come, and in any case, imports of high sulphur petcoke have declined in 2014. Higher shipping costs, increased domestic supply and a sluggish economy have conspired to slow China’s appetite. Most imported HS petcoke comes from North America.

There has not been any announcement yet, so this is just an opinion of mine that a ban will come.   While it seems likely in the current environment, regardless of the limited contribution such a ban would make to China’s pollution fight, we will watch for any future announcement on this.

(In Customs data, high sulphur petcoke is defined as any coke having sulphur levels above 3%. Such coke makes an important contribution to the supply of coke for anodes for the aluminium industry.)

 

Chinalco GM “under investigation”

Written by Paul Adkins

Reuters is reporting that Mr Sun Zhaoxue, general manager of Aluminium Corp of China (Chinalco) is under investigation for “serious disciplinary violations”, a euphemism for corruption. The news comes via a notice published by the Central Committee for Disciplinary Investigation (CCDI). This is the Communist Party’s anti-corruption watchdog.

Mr Sun is also vice Chairman of the listed company Chalco, according to Reuters.

We will bring any more news on this as it comes out.

No talking about talking

Written by Paul Adkins

Antaike, the daughter company of  the Chinese Government’s China Non-ferrous Metals Industry Association (CNMIA) has announced that their annual aluminium conference will be held in Kunming November 25-27. That’s exactly the same dates as the ARABAL conference.

Antaike’s conference is a difficult one to organise, because there are so many stakeholders involved.   A few years ago, AZ China had some informal discussions with Antaike about cooperating for the conference. Out of those discussions (which came to nothing, as they didn’t want our help) it became clear that they needed to consult with the leaders of several aluminium companies, sponsors, organisers and other stakeholders, to gain agreement to a date.   It’s often the case in China – hubris dictates that egos must be stroked, especially when SOEs (State Owned Enterprises) are involved.

The Antaike conference is always held in southern China, as it’s too cold in the north!

But since they were second into the public domain with the date, surely it wouldn’t have been too hard to select a different date?   As it is, Antaike normally holds their conference overlapping a weekend, but this year have moved mid-week.   Couldn’t they have spoken with the Arab Aluminium Association to check the dates?

It’s a case of two behemoths demanding attention, but for mine, ARABAL deserves the better attendance. The Arab industry represents the second largest production region, while Antaike represents the largest.  ARABAL is of course heavily oriented towards the Arab aluminium sector, but the conference agenda clearly has a global view, with topics including the dynamics of the current global bauxite and alumina markets.  Antaike’s papers are usually Party-approved rehashes of policy, or ridiculous assertions, such as one foreign speaker’s claim that China would be importing 4-5 million tonnes of metal by 2015 (in the 2011 conference).  ARABAL usually has a heavy weighting of industry leaders (which means you get the corporate view which tells you little), but Antaike gets mostly traders and lightweights who have no views.

The two organising groups have structural differences that might have had something to do with the clash of dates. ARABAL’s organising committee has representatives from all the smelters in the region.   Antaike is a for-profit company run indirectly by CNMIA, and holds multiple conferences throughout the year, including for copper, nickel and cobalt.

But both conferences will suffer from the competition against each other. None of us punters will be able to get to both, given the time zones and travel times.   If they genuinely had something to offer us, they would have gone to some lengths to ensure we don’t have to make the choice of conferences. Few of us can afford to attend more than 1 conference per year anyway, and while our time is more important, the cost is also a factor, and on that score, Antaike wins. But it’s not a simple matter of cost, but of bang for the buck. If you are a trader in the China market, Antaike is worth it – not for the conference but for the meetings outside and around the conference. If you are a global player, ARABAL offers a cheaper alternative to the same thing than the upcoming Metal Bulletin conference, which is asking US$2400+ for a conference that runs 1.5 days.

Yes, it’s true I am not an unbiased observer, since AZ China had its own conference back in May. But we spent considerable time checking the calendar to ensure we don’t clash with the likes of CRU or Harbor or AMM.