Category Archives: Uncategorized

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…

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.

 

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.

 

Explosion at aluminium plant kills 68

Written by Paul Adkins

An explosion at an alloy wheel plant in China killed at least 68 people yesterday, and injured almost 200 others.   The accident occurred in Jiangsu province’s Kunshan city.

Any time an explosion this big occurs in an aluminium factory, the first fear is that somehow liquid aluminium has come into contact with water. But in this instance, it seems that a gas line in or very near to the factory was ruptured.   Investigations into the exact cause of the accident are still under way, but TV footage showed the road outside the factory ripped up along the line of the gas pipeline.

Aluminium melts at 660°C. In its molten form it is highly reactive to water, as it seeks the O2 in water to re-format itself back into alumina.   But that reaction releases hydrogen, which can lead to spectacular and highly dangerous explosions.   The ratio of water to liquid metal is crucial.   Take a bucket of water and put one drop of liquid aluminium in it, you will not get an explosion.   Take a bucket of liquid aluminium and put one drop of water in it… well, don’t do it if you want to stay alive.

Accounting fraud in China

Written by Paul Adkins

The phantom collateral that rocked Qingdao has left the metals market worried and uncertain, and raised serious questions about accountability and transparency in Chinese firms.  What some observers haven’t acknowledged is that the methods used to secure the multiple loans are neither particularly new nor innovative. Whereas corporate malfeasance in the West can take the form of labyrinthine arrays of special purpose entities and porous contracts, Chinese accounting fraud tends to be relatively straightforward deception. Thanks to loose and opaque accounting practices, there’s little need for multifaceted networks of half-truths; simply inventing an entry in the books usually suffices.

It wouldn’t, however, if the companies took more a proactive management attitude.

The Qingdao scandal came to light when a corruption probe in Qinghai’s capital, Xining, came across questionable dealings at Dezheng Resources’s subsidiary, Decheng Mining. The central government happened to be investigating a business partner of Xining’s Party secretary. As is common knowledge by now, the allegations are that Decheng took out multiple loans on the same collateral. To outside observers, this seems like something that should have been avoided with a fairly routine warehouse check, but it’s not an uncommon trick. Real Gold Mining suffered in a similarly reckless way in 2011, as the company’s mines were used as collateral for the owner’s private loans, a fact that went unnoticed by their third-party auditor despite it having being a matter of public record for over a year.

Another example is the pig and animal feed company AgFeed Industries Inc., where it was discovered senior management had simply been keeping an outside book for years, falsifying numbers to manipulate their stock price and reported nearly $239 million in fake revenue. In the absence of adequate oversight, the deception wasn’t discovered until this year, despite having been going on since 2008. Their US-based executives, having already overcommitted to their Chinese partners without checking if the numbers matched reality, compounded the issue further by trying to perpetuate the cover-up.

Multinational companies are facing the consequences of having little representative or physical presence in China to keep an eye and report on obvious discrepancies. Many have relied on independent teams from the big auditing firms to conduct their reviews for them, but they’re often left to the mainland member firms, with the final audit sign-off coming from Hong Kong. When ordered to look at a foreign-traded company, these auditors run into a legal grey zone; the central government may or may not have classified Chinese company accounts as state secrets. When the SEC ordered the Big Four to turn over working papers, they refused for fear of angering Beijing, which resulted in the Chinese member firms’ six-month ban back in January. The third-party auditors can’t make up for strict internal overview on the mainland.

Companies operating in China could take a more aggressive stance from the get-go to avoid accounting nightmares and alleviate fraud risk. In the case of companies trading in physical goods, stocks should be checked thoroughly; warehouses have been known to rent supplies for the day to convince visiting auditors that the numbers are correct. China’s informal network of unofficial suppliers can also create nightmares for auditors; documentation and a serious vetting process should occur before any business dealings take place. Strict regulations in place for revenue recognition are imperative, and they should be crystal clear to everyone. After this latest scandal, double-check and verify receipts to make sure they haven’t been falsified.

Most importantly, companies should foster a corporate environment where employees are willing to blow the whistle, knowing they will have the full support of the management. Internal audits should occur regularly, but it’s important to have a plan in place for the minute a red flag is raised internally or externally.
Accounting fraud in China is pervasive, but it’s not particularly insidious. Clear and concrete accounting rules and management policies can nip the majority of scams in the bud. Those who fall afoul are usually the ones who were overeager and rushed in too quickly, only to find out the warehouses had been standing empty for months.

 

Editor’s note: this is a guest post by Michael Laridan, from accounting firm DX Consulting]

 

Sources:

http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541102314#.U9HxSICSy_0

http://www.forbes.com/sites/ninaxiang/2014/04/16/accounting-fraud-is-still-widespread-among-chinese-companies/

http://www.sjgrand.cn/alleviating-fraud-risks-china
http://uk.reuters.com/article/2014/06/13/china-qingdao-idUKL4N0OS1XO20140613

Qing Dao – ripple effect

Written by Paul Adkins

The scandal at Qing Dao port is having a ripple effect way outside its initial sphere of activity in alumina and aluminium.

It now emerges that at least 18 domestic China banks were allegedly hoodwinked by the perpetrators, with an unknown number of foreign banks and international traders.   As well, the whole process of using Letters of Credit for commodity trading is now under attack.

It is alleged that the company at the centre of the scandal, Dezheng Resources, allowed one of its subsidiaries to forge the company seal and other documents used by the Qing Dao Port Authority.   Those items were then used to create documents showing “ownership” of commodities, such documents being sufficient to convince these banks and traders to issue credit.

Essentially, anyone holding one (or more) of those fake documents is now out of pocket.

There’s a whole line of argument as to whether the banks and traders who got conned deserved what has happened to them.   Did they get greedy?   Did they have proper due diligence processes in place, and were those processes used?

Whatever one’s view on that, there’s no doubt that those banks and others who avoided getting caught will now retightening their systems to avoid a future occurrence.

It has been reported that 300,000t of alumina, 80,000t of aluminium and 20,000t of copper were involved.   Although the actual material has a value of roughly $300 million, the losses are likely to be 10 times that amount.   With at least 18 banks involved, it suggests these parcels of material were presented as collateral multiple times.

The ripple effect extends even further.    The Industrial and Commercial Bank of China (ICBC) has now applied to a court for the right to not honour a Letter of Credit (LC).   LC’s are at the heart of commodity trading.   They are relatively safe, not too expensive (usually about 1% of the transaction), and readily convertible. But it seems that trading of LC’s has also been part of the Qing Dao story, where the LC’s value can be recycled several times within the life of the LC.   The effect of being caught is that banks are now also slowing the LC issuance process, and now also (legally) defaulting on payment of the LC.

This will impact all commodities, from metals to maize.   It will also have some impact on the availability of credit within China.   Credit remains the single most important “asset” that companies can attain, and credit has fuelled China’s economic growth for years.   Perhaps players will find new means of obtaining credit and playing the system, but meantime, the screws just got turned a little more on China’s economy, thanks to one or two rogue players in a small city.

 

Where’s Heisenberg when you need him?

Written by Paul Adkins

Today China announced that Q2 economic growth came in at 7.5% year-on-year.

There are two possible responses to this announcement.   Some will look forward to increasing demand for iron ore, coal, copper – generally speaking a return to the paradigm that has been in place for so long.   Others will look back and cast a more critical view of this number.   In a sense, both positions are right.

Those who care to look more closely will find it hard to verify such a strong result.   The pillars of GDP growth are simply not there.   Property sales and construction growth have slowed. International trade is still not back to full health. Domestic consumption is not at the levels that the government hoped for.   But the Communist Party says it is achieving what it set out to achieve, so who are we to question the result.

And that is just the point. While Beijing has pinned its flag on the pinnacle of 7.5% growth, most likely before it arrived there, meantime, credit supply and money growth are quietly being primed for the sprint to the finish line. M2 money supply rose to  14.7% y-o-y from 13.4%, while new total social financing (TSF) also rose strongly to RMB1.97trn in June from RMB1.40trn.

In other words, we probably will see increased activity in infrastructure and housing and other investment-led economic activity in the second half of this year, and we almost certainly will see that China achieves its target of 7.5% growth in 2014.   Iron ore, coal, copper and aluminium will all gain from the renewed optimism outside and inside China as a result of announcing this Q2 score.

But it was Heisenberg that said that the more you measure a phenomenon, the less you can measure its velocity.   In other words, you can measure one but not the other at any given observation.   Which leads me to suggest to Beijing that they stop talking about 7.5%, and stop predicting it, because it’s more important to be travelling at that speed than to chalk up the correct score.

 

Goodbye Alcoa Aluminum, hello Alcoa

Written by Paul Adkins

Alcoa’s announcement last week that it is paying almost $3 billion for a aerospace parts manufacturer is a sure sign of a longer-term strategy to take the company away from aluminium.

Firth Rixson, the company at the centre of the takeover, uses little aluminium in its products.   But it is at the core of the aerospace parts market, producing jet engine blades. “We are really material-agnostic,” Klaus Kleinfeld said in an interview on Thursday.

According to press reports, Alcoa changed its company description – the piece that goes at the bottom of press releases.

Instead of “the world’s leading producer of primary and fabricated aluminum,” Alcoa now calls itself “a global leader in lightweight metals engineering and manufacturing.”

Interesting that this new self portrait does not contain the word aluminium, and more interesting that it does not mention extraction, refining or smelting.   By its own description Alcoa now seems happy to talk about its downstream activities.

There’s been speculation around the industry for almost a year now, that Alcoa would eventually syphon off the primary metal part of the business.   That step may still be a long time away, but these moves by Alcoa do suggest that it’s not impossible.

Still, investor seem happy with the result, with the share price now at new yearly highs.

Weekly report review: weak market behind stable prices?

Written by June Wang

Dear readers, here is our latest “Weekly Report Review” . If you have any questions or requirements please tell us, thanks!

weekly report

 

Energy

With Iraq tensions increasing, crude oil prices climbed to a new level and stood at $107.26/t last week. Focussing on the domestic market, the coal price fell further due to high inventory. A situation that leads traders with a negative outlook to think the price will go down.

Alumina and aluminium

Import prices remained stable last week, however imported material is uncompetitive when compared with domestic alumina. For aluminum, there is no positive change in the downstream market. On-demand procurement volumes were limited to sustain price increase. Last week, aluminum price went down slightly.

 Raw material of AL

Although downstream demand continued be weak, refineries controlled their output to a relatively low level which helped petcoke prices stabilize. With oversupply and tighter cash-flow within the industry, they can’t push the prices up easily. Additionally, as demand for aluminum in the main market has shown no sign of a rebound, the  price might drop again.

ALF3 price continued to rise due to the low inventory levels, increasing by ¥50/t WoW. For good news, fluorspar prices started to rise slightly.

Aluminium output suffers as World Cup begins…

Written by Paul Adkins

Talk about priorities – the “Beautiful Game” is causing aluminium output to suffer!

A newspaper report today says that in Ghana, the local aluminium company, Volta, has been asked to cut back on its electricity consumption, because more power is needed to satisfy the huge demand for electricity during games in which Ghana is taking part. Neighbouring Ivory Coast will supply electricity to cope with the peak times, as its games are not scheduled at the same time.

Okay, so I grant you that Ghana’s aluminium supply is not a global game changer, but such is the pulling power of FIFA and football.  Here we have national economies experiencing a small shock thanks to a sport.   In a similar display of pragmatic priorities, the coup leaders in Thailand have announced that the curfew has been lifted for the World Cup.   And no wonder – games will be televised at awful times, 11pm, 2am and 5am, thanks to the time zone differences.

AZ China has an excellent reputation for its forecasts and outlooks, so here are our tips for the carnival -

  1. Australia to go through the 3 initial games without scoring a single goal (sigh)
  2. Brazil to score much egg on face with venues not complete, transport links not working and too much Cachacha
  3. Germany to take home the silverware. Spain as the possible spoiler.