Monthly Archives: June 2011
The word is out that Bechtel have purchased the coker technology section of Conoco Phillips. Several of the senior engineers have been transferred to Bechtel with the purchase, though it isn’t clear yet what this means for COP’s needle coke and specialty coke group.
One can argue that an engineering company is a better place for design and licensing of technology than a user of that technology, though I wouldn’t. I know that with Pechiney technology, the former Pechiney made as much money from sales of technology licences as it did from some other major divisions of the company. Sure, it raises problems that others in the industry have to go to their competitor to gain access to the technology, but there are ways of firewalling the business unit.
To me, this signals that COP is looking to streamline its business, and perhaps gradually lose minor segments such as coke.
In other related news, Yanchang Petroleum, based in Shaanxi province, has announced it will form a JV with KBR to market KBR’s VCC technology. VCC is a process which allows for the use of coal oil, heavy oil and other “bottom of the barrel” stocks to be processed for increased fuel production.
Editor’s update: Conoco Phillips have now supplied us with a copy of the press release on the sale of the technology to Bechtel. In their email, they also make it clear that the sale in no way represents any sort of change of strategy or intention to streamline out of coke sales. Here are the relevant parts of the press release:
Anyone in the country who didn’t already know that today is the 90th anniversary of the founding of the China Communist Party, will have no excuses this morning.
The morning news on Beijing TV led with stories about the CPC, the planned celebrations and the history, and finished the half-hour bulletin with a 5-minute tribute to the Party.
As if that wasn’t bad enough, the tribute featured music that would have gone well at a funeral procession. The images were of the Chinese countryside, Tiananmen Square and other historical landmarks.
It was enough to drive me to the office… or at least switch over to the foreign channels on my satellite dish.
A recent article in Business Insider reports that a Chinese group recently toured Guinea in West Africa, and proposed building an alumina refinery and aluminium smelter in that country.
That got the attention of UC Rusal, who is at the same time facing punitive action from the Guinean President, Alpa Conde. President Conde has revoked Rusal’s licence for the huge Dian Dian bauxite reserves, and demanded that Rusal pay $1 billion in back taxes, fines and interest.
The Chinese group, Jiuquan Iron & Steel Group (JISCO), met with The Guinean Mines Minister and Prime Minister, and proposed that the complex be built at Fria, which happens to be close to Rusal’s alumina refinery.
That presents Rusal with two “theatres of war”, if you will. Apart from fighting the punitive actions, fines and the loss of rights to the bauxite reserve, they now worry that the Chinese will push to make use of Rusal’s infrastructure, including rail line and port facilities.
But Rusal sees a third front in this war, suspecting that foreign interests are at work behind the scenes. The fact that President Conde is using a legal team from George Soros’ company to investigate Rusal’s rights and liabilities is feeding that paranoia.
Interesting to note that the article mentions that Rio Tinto’s $700 million deal for the Simandou iron ore project has yet to yield dollar one for the Guinean government. President Conde has Rusal in his sights in an attempt to get more money into their cash-strapped coffers.
Green pet coke has enjoyed a nice little fall in prices the last several weeks, but the big question is, where are the prices heading?
In the case of fuel grade coke, the answer is simple. It has a natural floor in thermal coal prices. Allowing for the different heating values in the two, fuel grade coke is likely to go no lower than about RMB1200, compared to thermal coal at about RMB950. Any lower price will see a switch to the cheaper fuel, which will soon lift its price back up off the floor. However, we think that thermal coal will see a lift in price, especially in Q4, taking fuel coke with it.
For anode grade and high purity cokes, the picture is a little more cloudy. We have been on the downward slope for several weeks, but will that slope prove to be in the shape of an inverted J, with a long slow rise off the bottom, or will it be more like a V, with a steep rebound?
China’s oil refineries continue to pump out large quantities of coke, largely as a result of their protracted diesel runs. To date this year, Chinese pet coke production is running 20% above that of 2010. Meantime, speculators imported large quantities of green coke, taking advantage of the lower prices in the USA and elsewhere.
Looking forward, demand signals are hard to find. The Chinese aluminium industry will certainly contribute some increased demand. We expect to see 1.5 million tonnes of new capacity enter the market in the coming 3 months. But that is not enough to soak up all the coke. Export levels have risen, as the big producers seek to reduce inventory. One thing you don’t want in China, with increasing interest rates and capital getting harder to obtain, is lots of cash tied up in inventory.
But the same is also true for their domestic markets. Calcining plants, anode producers and aluminium smelters are all resorting to a Chinese version of “Just in Time” purchasing, running inward stock levels down.
Possibly the only bright spot on the horizon, in terms of market stimuli, is that the Chinese economy is close to its soft landing point, if the chatter from Zhongnanhai is anything to go by. Last week, Premier Wen Jiabao declared the war on inflation largely won. Money supply has tightened, asset bubbles are less likely, and there is still a need to bring the economy in at a growth rate of at least 8%. These factors may well combine to see the Government ease up on the brake pedal, and maybe even touch the accelerator again, though ever so lightly. Don’t be surprised if by the end of Q3 the Chinese economy is starting to rebound.
That would stimulate some markets, though it would do little for green coke prices, especially anode grade. While a growing economy will need more aluminium (and other key building materials), it isn’t that easy to turn on additional aluminium capacity.
So we don’t think that coke prices will follow a W curve. Prices are well below the giddy heights of a few years ago, and things would have to change considerably before prices got back on the roller coaster. Those of you who remember 2007/2008/2009 prices will be relieved to know that!
We did a sweep of market opinions and discovered that the market players foresaw an X pattern. Why an X pattern? Because they had no clue.
We will update our outlook on green coke prices, and therefore calcined coke and anode prices, in our next Black China Report, due out in a couple of weeks.
China will be in the news for several reasons this week.
Friday will see the China Communist Party celebrate 90 years of existence (see my previous post).
Tomorrow, the new bullet train service between Shanghai and Beijing will commence operations. The train will be limited to only 300kph, to appease safety concerns. Plenty of media are reporting on this.
Several newspapers around the world carried an article on China’s straining cities. Quoting a McKinsey report, the article says that China will have more than 200 cities with populations over 1 million people. True, but I would urge you go look at the original McKinsey report. Check when it was written.
According to our study of the urbanisation trends, the rate of migration into cities is actually slowing, and has been for the last few years. Still, the numbers are enormous. When the Chinese Government announced that this year they will build 10 million new affordable housing units (apartments with net area of no more than 60 square metres), that’s not nearly enough to house all the city-bound immigrants in a single year.
Meanwhile, Beijing is choking. I wrote in my piece on Singapore that Beijing’s pollution index hit 468 last week. This morning, it is at 309. According to the US Embassy here in Beijing, this level is dangerous for all the population. (The Air Quality Monitor is located in the US Embassy, about 5 kms from my home. You used to be able to check the AQI reading on their website, but the Chinese Government had it removed. Now it’s hidden in an Iphone app.)
On my morning walk this morning, the air had a lovely odour of stale sulphur mixed with burnt coal. Looking out my study window on the 26th floor, visibility is down to about 200 metres.
One can only hope that all this pollution is some sort of sign that China’s steel mills and power stations are running at full speed.
Where else but in a Communist country would a political party’s anniversary of creation be marked by national celebrations?
China’s Communist Party will celebrate its 90th birthday on Friday. Around Beijing, one can see banners and flags being erected around the streets, potted plants lining important avenues and workers cleaning, painting and decorating.
Other preparations include locking up dissidents, activists, protestors and petitioners.
I won’t take up too much time in this space, save to recommend some reading about what the Chinese Communist Party really stands for, what its role is, and how it operates.
Top of my list would be Richard McGregor’s excellent work, “The Party”. McGregor pulls no punches in describing the subservient role that Government plays, at all levels. I wasn’t able to find a copy in any bookstore in Australia, but finally got my copy on Kindle.
To understand the selection process for leadership positions, and the balance of power between the Party, the Government and the Military, read Patrick Chovanec’s long but first rate piece on his blog. Use this link.
To understand the cosy relationship between the Party and organised crime, have a look at John Garnaut’s articles in the Sydney Morning Herald. It’s scary stuff, just how entwined the two are.
Others I would recommend on China include Gady Epstein, Forbes Magazine’s man in Beijing, although I have to say Gady sometimes reports what other people feed him, and Michael Sainsbury, of the Australian newspaper (a Rupert Murdoch publication, be warned.) Dinny McMahon from the Wall Street Journal sometimes has some good articles. Unfortunately for a lot of the mainstream journals, they are limited in what they can report, not because they are censored or self-censored, but because they usually can’t get access to the right people. They get access to the official people, not the right people, and get the official story.
Here is a link to a blog site called the Contrarian Investors Journal. Although it is written from Sydney, it tackles global topics such as gold and silver, economic issues, asset bubbles and so on. This blog has previously covered issues such as China’s real estate bubble, China inflation and the raw materials industry here.
We sent press releases or restricted copies of our White Paper to selected media outlets. This was one of the best reviews we have seen. Thanks to the people at CIJ for the excellent coverage.
If you are interested in a copy of our White Paper, called “Powerless?”, contact us here at AZ China.
Editor’s update: I forgot to mention, if you want to view the Contrarian Investor’s Journal from inside China, you need a VPN. It is blocked inside China. It’s a shame - the quality blogs are blocked, but the lowest common denominator sites are freely available. If you are interested in see this piece (or others) on CIJ, let me know and I will send you a copy.
I have just spent several days in Singapore. (I was supposed to be in Chicago for a conference, but client duties dragged me south instead of west.)
The day I flew out of Beijing, the Air Quality Index was at 468. Anything over 50 is considered “pollution”, while anything over 100 is considered unhealthy. Today the air quality is sitting at a much more reasonable 192. Today, I can see the buildings across the street, where a week ago, all I could see was a brown haze.
In Singapore, the air was clean, though equally hot and at times more humid. Of course, Singapore does not have the same climate or terrain as Beijing, nor does it have the countless steel mills and coal-fired power plants as neighbours, that Beijing does.
But my lungs did not complain.
Singapore is also home to many Chinese. We could and sometimes did converse in Mandarin with taxi drivers, waiters, and shop assistants.
In a strongly Chinese environment then, it was refreshing to note that in Singapore, there is no spitting, no littering and almost no jaywalking (I saw one or two). These three habits are prolific in Beijing. One can only hope.
One last observation/comparison. Singapore’s drivers are much better behaved. In my week there, I did not see people park on the sidewalks, drive down bicycle lanes, create extra lanes at traffic lights, turn left from the right lane, or do the many other crazy manoeuvres that one sees on Beijing roads.
As you maybe can tell, each time I return to Beijing, I ask myself, why on earth do I choose to live here?
I learnt the other day that you have to be careful what you say and to whom.
Following a recent post about the electricity shortage, I was contacted by a blogger based in the USA. She wanted to know more about the problem, and wanted a copy of our White Paper that we released last week.
Since the white Paper is for sale, I declined to send her a free copy, but gave her an extract from the Conclusions section of the report.
Now I see on her blog that our White Paper is being used as part of an argument “Ten Reasons to Short China”. We do not argue anything of the sort in our White Paper. We see coal prices and aluminium prices rising in the second half of this year, but that will be because demand is outstripping supply.
Anyone who uses the electricity shortage as an argument in favour of a “hard landing” theory for China clearly doesn’t know China.
Most people know that the shortage of electricity that is current (pun intended) in China is due to the price of coal. The electricity generation companies have been baulking at paying the high price, and running only on contract coal, which they purchase for a much lower cost.
That’s on the surface, but there’s more to it. The power generation companies certainly buy coal at a lower price than the spot market. But here’s the rub. They are re-selling their coal back into the spot market. they take as much coal as the contracts allow, then sell “surplus” coal. In some cases, their reported profits have come more from reselling than from power generation.
This was exactly the situation that was occurring in the iron ore industry, and why Rio Tinto and BHP Billiton of the iron ore industry wanted to get rid of the two tier pricing system.
Of course, this tactic begs the question, what happens when the power generation companies run out of coal? The answer is, it becomes the Government’s problem. The generators refuse to buy coal at the price they have just sold their own stocks for, so they stop producing electricity. Factories and shops and offices and homes start to notice the electricity shortage, and who do they blame? Not the generators, but the Government.
The Government has no option but to raise electricity prices to make it more profitable for the generators to make money with electricity generation.
Why doesn’t the Government control the actions of the generators, and force them to burn the coal instead of reselling it? Because the key people in every layer of management are measured by the Communist Party’s Organisation Department, using profit growth as the key measure. Careers are at stake, but they are built not by doing what is best for the country in some altruistic way, but through turning in a report card that shows you made money during your tenure in that job.
Problems such as the electricity shortages are created by the very system that runs the country.
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