andrew@matauadvisory.com.au
+61 412 122 778

Some markets are capitulating … too much uncertainty to make decisions.

Contango is when forward prices (3mo fwd) are higher than cash (spot) prices, i.e. the market is more confident of supply now than into the future.  Backwardation is the reverse, when cash prices > fwd prices, i.e. markets are more worried about (prepared to pay more for) near term supply than future supply.

Last Friday, after Trump’s decision to tax / tariff all imports from China, markets appear to have capitulated in frustration, at trying to determine what direction the market(s) will move next.  We have seen previously that when a base metal (Cu, Zn, Pb, Ni, Sn, Al) market cannot figure out the direction of the market, that the prices (cash & 3mo fwd) move to parity (cash = 3mo fwd).   I cannot recall seeing all six base metals markets heading so close to parity as they have last Friday.  Such convergence is very unusual.

For some further detail see this week’s commodity review Commodity Review – 02 August 2019  .

EV revolution could stall due to mineral shortages

An article from Petroleum Economist  (italics are Matau Advisory’s emphasis) is below.

 

Note that the article’s assumptions are that by 2050, 100% of cars in UK will be electric.  My limited imagination suggests that is a big ask.  Thus the required increase in demand for critical commodities will appear dramatic.

Note also that BHP and BP assume that EVs may achieve 40% of market share by 2040. 

Matau’s thinking is that with the time constraints on discovery, evaluation, permitting, construction and commissioning of new projects being approximately 6-10 years (with the average skewed to the longer term), that supply of the critical commodities, (lithium, cobalt, graphite, nickel, copper, manganese) to battery factories at the very high forecast growth rates (+20% p.a. for ~ 10 years from 2020) will seriously constrain growth rates, to likely less than 10% p.a., based on current new mine production growth rates, and even that supply growth rate will be a challenge.  i.e. that the EV uptake will be limited by supply of critical materials. 

It is not so much the political stability of the jurisdiction, rather the process from discovery to delivery (anywhere in the world).

That commodity supply thematic also applies if enthusiasts want to displace Li-ion batteries with a different battery construction that may include say vanadium, zinc-air, et al. 

There may be scope for new technology to improve recoveries of some of the key elements from existing operations, though these technologies have yet to be identified and or applied. 

This article refers to the logistics for delivery of power supply for EV’s to the UK.  Many other countries have lower population densities, spread over larger areas, which suggests to Matau that the greatest uptakes are likely to be within major cities.  Also many large cities have created their own (polluted / photo-chemical smog) microclimates that a high level of EV uptake could alleviate, including examples such as Los Angeles.

Matau applauds the development and adoption of EV’s though considers that careful thought and management of expectations is required.

 

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EV revolution could stall due to mineral shortages

More planning is required to ensure adequate supply, researchers say

A potential shortage of minerals needed to produce the billions of batteries required to power electric vehicles (EVs) risks slowing down the transition from internal combustion engines (ICEs) to cleaner forms of transport, according to a team of UK-based scientists.

Researchers working on the Security of Supply of Mineral Resources (SOS Minerals) multi-institution research programme, partly funded by the UK government, have crunched the numbers and come up with some daunting-looking headline figures.

They looked at the amount of minerals required to make all cars and vans in the UK electric by 2050—based on the current UK fleet size of some 31.5mn vehicles—and for all new sales to be purely battery electric by 2035.  Both are recommendations contained in a report by the parliamentary Committee on Climate Change (CCC).  In early June, these were being considered for adoption by the UK government, whose current pledge is limited to eliminating ICE sales by 2040.

The team concluded that just to meet these UK targets, assuming the vehicles use next-generation NMC 811 batteries, would require just under two times the world’s total annual cobalt production, nearly all world production of neodymium, three quarters of the world’s lithium production and at least half of the world’s copper production, based on 2018 data.

Just ensuring that EVs meet UK demand for new cars and vans from 2035, would require the UK to import the equivalent of European industry’s entire cobalt consumption, according to a letter sent to the CCC in early June.  It was signed by Richard Herrington, head of the Earth Sciences department at London’s Natural History Museum, and other scientists involved in the SOS Minerals programme.

Scaling that up to a global level would, of course, be an even a greater challenge.  By 2050, some forecasts predict, there will be at least 2bn cars on the world’s roads.  Herrington estimates that if all of those were to be EVs, annual production of neodymium and dysprosium would need to increase by 70% and stay at that level until 2050.  On the same basis, annual copper output would need to more than double and cobalt output would need to increase by at least 3.5 times to meet global demand.

Herrington told Petroleum Economist that increasing minerals production to meet the envisaged increase in the EV fleet—as well as for the additional renewable energy and storage infrastructure required to power the fleet and extract the minerals—would be challenging but not impossible.

“[The ambition] is laudable, and it could be plausible.  but it needs greater thought as to where those materials might come from,” he said.

Many of the rare earths and other minerals used for batteries are mined in politically unstable parts of the world, such as parts of sub-Saharan Africa.  Herrington believes they could be sourced closer to the main EV markets, providing greater security of supply, as well as boosting overall production.  That includes Europe, where, for example, more cobalt could be recovered from copper mines than is currently the case, if new technologies were deployed, he said.

The increase in renewable energy infrastructure needed to provide power for EVs would also consume more metals and minerals.  Wind turbines require a lot of steel, while solar panel installations consume several scarce minerals, such as high purity silicon, indium, tellurium and gallium.  Extracting the minerals themselves is also a power-hungry process, adding to demand.

Then there are the transmission lines needed to connect them to the grid.  Herrington notes that a power station requires fewer copper-based cables than hooking up the hundreds of wind turbines required to produce the same amount of power.

“You could be more aggressive with carbon capture and still continue with hydrocarbons to generate power,” he said.

However, given the faltering progress of efforts to get carbon capture and storage moving in the UK and elsewhere in the world, for now, this technology seems unlikely to be able to play more than a bit part in efforts to allow coal and gas to play a long-term role in the energy sector.

Herrington does not believe the potential minerals supply crunch necessarily means the world will have to use more oil for longer in the transport sector.

“I don’t think we have to.  We just have to make sure that we gear up, so that the alternatives are available in the quantities that we want,” he said.

Source: https://www.petroleum-economist.com/articles/midstream-downstream/power-generation/2019/ev-revolution-could-stall-due-to-mineral-shortages

 

 

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What Is GDP in China?

Below is a recent article by Michael Pettis (economics professor) of Peking University Beijing.   His articles are usually insightful.

Matau Advisory has recently been asked what GDP is actually made up of.    The article below, by Michael Pettis, succinctly describes the meaning of GDP and the three main ways that it is, in practise, (poorly) defined by its usage today, the third being uniquely Chinese.

Of the observations Pettis makes below, Matau has seen and reported some of the effects, as set out in the Commodity Review 25 January where Matau reported on selected items of China’s Industry and Energy Output data.   Positive growth for industrial and energy output is seen in relatively few segments, including Electricity (all segments), consumer items like Colour TVs, air conditioners, PV Cells, Li-ion batteries, et al and strong growth in Freight data (Commodity Review – 1 February).

Matau’s preference has long been to observe Industrial Production (output of products, not services et al), and production data included in IP, as measures that are directly related to consumption of commodities, in preference to monitoring GDP, as a guide to demand for commodities.    Pettis’ comments reinforces Matau’s view that IP and segments are appropriate data to monitor.

Following Pettis’ analysis, China’s GDP has slowed (over a few years), more than public reports indicate;  and Matau’s observations of China’s ‘Output of Industry and Energy’ shows that China’s industrial output has also slowed during the past 18 months.

Regards

Andrew

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What Is GDP in China?

  • Michael Pettis   Peking University in Beijing
        • China Financial Markets
        • Carnegie Endowment for International Peace

Analysts are increasingly skeptical that China’s very high reported GDP growth rate provides a meaningful picture of the economy’s health.   There are, however, at least three very different ways that reported GDP can fail to reflect the underlying economy.

  • January 16, 2019

Comments (39)

The Chinese economy is not growing at 6.5 percent.   It is probably growing by less than half of that.   Not everyone agrees that the rate is that low, of course, but there is nonetheless a running debate about what is really happening in the Chinese economy and whether or not the country’s reported GDP growth is accurate.

The reason for the widespread skepticism is the disconnect between the official data and perceptions on the ground.   According to the National Bureau of Statistics, China’s economic growth in every quarter last year exceeded 6.5 percent.   While that is much lower than the heady growth rates China has experienced for most of the past forty years, it is still, by most measures, a very brisk rate of growth.

And yet, when you speak to Chinese businesses, economists, or analysts, it is hard to find any economic sector enjoying decent growth.   Almost everyone is complaining bitterly about terribly difficult conditions, rising bankruptcies, a collapsing stock market, and dashed expectations.   In my eighteen years in China, I have never seen this level of financial worry and unhappiness.

These concerns have even breached academia.   One of my students told me yesterday that there was a huge increase last semester on the university website in the number of students selling their belongings because they are hard up for cash.   They are selling their phones, computers, clothing, and lots of other possessions.   He said the amount of selling is noticeably higher than last year, enough so that everyone is talking about it.   And he indicated that this is apparently happening at other schools too.   It seems that the poor and middle-class kids are squeezed for cash because they are getting much less money from home than they have in the past.

This isn’t what you’d expect to hear from an economy growing at more than 6.5 percent.   So what does it mean exactly to say that China’s GDP is growing at that pace?

It turns out that there are three completely different sets of problems that affect how China’s GDP growth statistics should be interpreted.   Analysts must keep these three problems straight and make sure that they don’t confuse matters by conflating these separate issues.

What Does GDP Measure?

The first set of problems relates to the meaning of GDP itself.   This challenge affects not just China but the rest of the world as well.   This is especially true for advanced economies with substantial technology and service sectors that employ technology whose value may be substantially understated by an inability to count it accurately.

GDP is typically assumed to measure the creation of real economic value.   If a country’s GDP rises by 5 percent over the course of a year, for example, this is interpreted to mean that the amount of wealth the country produced in the last year is 5 percent greater than in the previous year.   In other words, it would be assumed that the country’s ability to service debt would have increased by 5 percent, which means roughly the same thing.

But there is no way to truly measure a country’s creation of real economic value, as GDP is just a proxy for whatever it is thought to measure.   Economists have agreed which measurements go into calculating GDP, and the resulting sum is referred to as a country’s aggregate GDP, or the value of everything produced locally in that economy.

Of course, not all value-creating activities are counted when GDP is measured.   For instance, if you teach your friend Spanish for free, you add to the wealth of the economy, but you do not add to GDP.   By contrast, if he does pay you, the country’s GDP does increase by the amount of money you are paid, even though you are adding exactly the same value to the economy itself whether he pays you or not.   In addition, not all measured activity actually creates value: building a bridge to nowhere, for example, creates exactly the same increase in GDP as building a much-needed bridge.

No proxy of economic value is perfect, of course, but there are real questions about whether GDP is imperfect to the point of being useless as a proxy.   Does GDP really do a good job of capturing all the value creation in an economy?   While this is a serious problem everywhere, it may be even more of a problem in China because of the huge amount of investment in nonproductive activities that is counted in China’s GDP data even though this investment does not add to the country’s wealth or its debt-servicing capacity.

How Accurate Are China’s GDP Statistics?

The second set of problems has to do with how carefully and faithfully Chinese statisticians at the National Bureau of Statistics are calculating the agreed-upon elements that go into measuring GDP.   Do they tend to collect the data in the way that introduces mistakes that are systematically biased (upward, to show higher than actual GDP, I would assume)?   Or are they actually lying to please their political bosses?

I am pretty sure that China’s economic data collection is distorted in ways that smooth out volatility, but otherwise I assume, at least until very recently, that the National Bureau of Statistics has followed generally accepted rules for calculating GDP more or less correctly.   I don’t have a high level of confidence in my assumption though:  as I pointed out earlier, it is hard to find any sector of the Chinese economy that is behaving the way you’d expect a country growing at more than 6.5 percent to behave.   Furthermore, especially in recent years, it has been hard to reconcile other economic proxies with the GDP numbers.   (See, for example, this article by Johns Hopkins University economists Bob Barbera and Yinghao Hu, which itself refers to a satellite imaging study.)

What is more, people whose work I greatly respect, like Anne Stevenson-Yang of J Capital, seem very much to doubt the data and argue that China’s actual growth rate is much lower than the posted numbers, largely because the data is falsified at some level of the collection process.   But whatever the case may be, if there is indeed a substantial discrepancy between what the statisticians actually measure and what they are claiming to measure, it is very hard to make predictions about how long the overstatement will continue and how much of an adjustment it will eventually undergo.

Is GDP Measured as an Output or an Input?

The third set of problems with GDP occurs in a very limited number of cases globally (today, China is the main example).   But the implications are much greater.   This has to do with whether GDP is even being used as a proxy for economic activity.   In China, reported GDP does not tell observers about the economy’s performance; rather, it tells people how rapidly Beijing thinks it can impose the necessary adjustments on the Chinese economy.   This is because GDP means something different in China than it does in most other major economies.

In any economic system, GDP is supposed to be a measure of output, and in most countries that is exactly what it measures, however messily.   The economy does what it does, in other words, and at the end of a given time period, statisticians measure the things economists agree to include in the relevant calculations, and they express the change over time as the scale of GDP growth for that period.

This is not what happens in China, where GDP is actually an input determined annually as the country’s GDP growth target.   The growth target of a given time period is decided well ahead of time, and to achieve it, various entities, including local governments, engage in the requisite amount of activity, usually funded by debt.   As long as China has debt capacity, and as long as it can postpone the writing down of nonproductive assets, Beijing can achieve any growth target it desires.

But this arrangement changes the meaning of GDP.   Reported GDP in China is no longer a measure of economic growth, but rather a measure of political intention.   As any systems theorist knows, input data reveals nothing about the performance of a system.   So when analysts discuss what reported GDP indicates about the health of the Chinese economy, such thinking involves a very basic mistake in systems theory—a systems input can only offer insights about the goals of the operators, never about the performance of the system itself.

In practical terms, this means that once Beijing sets a GDP growth target, local governments are expected to generate enough economic activity to reach that target, and they are able to borrow as much as they need to do so.   If this activity were productive, there wouldn’t be a problem, although it would be an amazing coincidence (or a truly incredible feat of prognostication) for the amount of productive activity truly to equal the growth target.   What would be more likely in that case is that GDP growth would consistently exceed the target, which is indeed what happened until about a decade or so ago.

But if the economic activity isn’t productive, there are two requirements that allow China to set GDP growth as a systems input in a way other countries are unable to do.   First, there must be no hard budget constraints, so as to allow economic entities to persist in value-destroying behaviour year after year.   Second, the resulting bad debt cannot be written down.   Once these two conditions are met—and they are in China’s case—Beijing can set any growth target it likes and, as long as it has the necessary debt capacity, it can achieve that target.

But notice that achieving the target reveals nothing about the country’s real economic growth, for which GDP is supposed to be (however imperfectly) a proxy.   Once GDP growth becomes a systems input, rather than an output, it does not indicate anything about the economy’s health or performance.

Conclusion

There is likely to be no end this year to the discussions about China’s economic growth rate and its relationship to GDP.   By now, observers widely agree that China’s economy is not as strong as the GDP data suggests.   And I suspect that only a handful of the least imaginative resolutely-mainstream economists (and, weirdly enough, this is more likely to be true of foreign than Chinese ones) still believe that China’s economy is as healthy and brisk as would be expected from a country whose GDP is growing at 6.5 percent and is expected to grow next year by more than 6 percent.

The problems facing the Chinese economy, and the worries expressed by Chinese leaders, are so deep that it no longer requires much imagination to figure out that reported GDP in China simply does not represent what we think it represents elsewhere.   Yet some economists have not always understood the implications, and they often seem to refuse to adjust their methodologies to take into account the aforementioned problems with China’s reported GDP data.   Yesterday, for example, I read a report written by an economist that discussed the implications of China’s PPP-adjusted GDP being the biggest in the world.

But any observers that are at all skeptical about the relationship between the Chinese economy and its reported GDP must dismiss the PPP-adjustment as almost complete nonsense.   (I don’t mean that the PPP-adjusted data is less accurate for China than it is for other countries: I mean, quite literally, that it is almost complete nonsense).   Any ratio based on reported GDP figures can only be comparably meaningful for China to the extent that China’s reported GDP numbers have the same relationship to the underlying economy—or to whatever GDP is thought to mean—as corresponding numbers in other countries do.   But surely few observers still believe that.

The point is that if there has been a divergence between China’s reported GDP figures and the country’s underlying economy, there are at least three completely different ways that this discrepancy can manifest itself.   Observers too often confuse the three, however.   For example, I have said many times that I believe that if China’s GDP were to be expressed in a way that is comparable with that of other countries, it would be growing at less than half the current reported growth rate.

A lot of people interpret this to mean that I think Beijing is falsifying the data, but I don’t mean that at all.   In my mind, the biggest problem is that China’s reported GDP is an input into the economic system, not a measured output.   To make China’s GDP figures comparable to those of other countries, the input numbers would have to be adjusted with some relevant output, such as the amount of bad debt that should be (but isn’t) written down in a given time period.   If this amount were subtracted from China’s nominal GDP growth rate, the resulting adjusted growth rate probably would be a lot closer to what economists think of as GDP than the country’s actual reported GDP data is.

 

Aside from this blog I [Michael Pettis] write a monthly newsletter that covers some of the same topics covered on this blog.   Those who are interested in receiving the newsletter should write to me at chinfinpettis@yahoo.com, stating affiliation.

Correction: The original version of this article included the sentence “In addition, not all measured activity actually creates value: building , for example, would create exactly the same increase in GDP as building a much-needed bridge.” The phrase “building a bridge to nowhere” was accidentally lost during the process of posting the piece to the website and has been put back in.

Source:  https://carnegieendowment.org/chinafinancialmarkets/78138

China Couldn’t Dominate Asia if It Wanted to.

Matau considers that this note from foreignpolicy.com neatly echoes some aspects of international relations that we have observed over some time.  It highlights the errors of using old assumptions that have traditionally been applied to the western political world, and applying them to wider Asia. 

We have seen a number of Asian countries stand up to major powers, and state, at various levels, that ‘this is our country, and we will do these things our way’.  In order to successfully engage with these countries we need to recognise them and their identity, relationships and aspirations, something that at least one of the major powers is not doing today. 

It is an interesting read, with insights we will do well to reflect upon, and to keep our eyes and minds open.

==============================

China Couldn’t Dominate Asia if It Wanted to.

There are plenty of reasons Asia has been multipolar for almost all of recorded history, and Beijing understands them all.

By Parag Khanna

| February 3, 2019, 9:44 AM

It is now widely accepted that China aspires to displace the United States as the world’s sole superpower by 2049, the 100th anniversary of its modern founding.  Amid a trade war and military escalations, an atmosphere many describe as “Cold War 2.0” has set in.  But whatever happens between the United States and China, the outcome will not be a unipolar world, neither under American or Chinese tutelage.

The United States neither wants nor can afford to re-extend itself globally—nor do most countries want a return to American hegemony.

The same applies to China.  In fact, far from displacing the United States globally, it is not even likely that China will unilaterally dominate its own region of Asia.

To understand why, we need to quickly examine a pair of interrelated theoretical and historical falsehoods.  A highly selective reading of the past two centuries leads many analysts to view geopolitics as a contest between the two most powerful states in the system at any given time.  It is as if the planet is a frictionless table on which the United States and China alone are playing a game of Risk.  But the global system as a whole bears no little resemblance to the narrow European historical template on which this power transition theory is based.  Europe is composed of societies that share a small region and have common culture and religion, with each fearing conquest by a neighbour.

But to understand Asia, it makes more sense to look at Asia’s geography and history.  In the West, “Asia” has become shorthand for East Asia or Greater China.

In reality, Asia’s vast landscape stretches from the Mediterranean to the Sea of Japan, a diffuse constellation of unique civilizations centred on fertile regions such as the Tigris and Euphrates Rivers, the Indus Valley, the Gangetic Plain, the Yangtze and Yellow Rivers, and the greater Mekong region.  Unlike a Risk board, Asia is not flat but extremely bumpy.  The Tibetan Plateau and Himalayan Mountains, Taklamakan Desert, and other harsh terrain are among the major natural barriers to power projection across Asia.

With geographies so distant and cultures so distinct, Asia has remained multipolar for almost all of recorded history, with Mongol suzerainty in the 13th century the sole exception (for the Mongols were themselves nomadic rather than sedentary people).  Rather than seeking far-reaching conquest, Asians’ attitude has generally been to live and let live.  Over centuries of Silk Road interaction, commerce and cultural exchange are far more the norm than conquest.  Even the Mongols ruled by way of adopting local religions and languages.  A proper appraisal of Asian geography and history thus reminds us that Asia is not a set of dominoes that will fall before an expansionist China.  China may be as nationalistic as ever, but the Chinese are not the new Mongols.

Understanding the patterns of centuries past helps us forecast the evolution of China’s Belt and Road Initiative, which President Xi Jinping himself proclaimed as “the project of the century” at its first convening in 2017.  Even though the Belt and Road Initiative is an informal coalition with the sensible aim of coordinating trillions of dollars of desperately needed infrastructure investment across more than 60 countries, a narrative has taken hold in Washington that Belt and Road is a nefarious plot aimed at neo-colonial hegemony through debt traps that result in militarized extraterritorial ports and control over foreign economies.  Reality veers between both versions of this story.  Importantly, consistent with Asian history, China alone does not determine the outcome as much as the rest of Asia’s powers, which have thus far been neglected in geopolitical conversations.

For those uninitiated in China’s nearly three decades of sustained infrastructure investment in its periphery dating to the collapse of the Soviet Union, China’s grand strategic motivation for the Belt and Road Initiative is as much defensive as offensive.  Over this period, China has become the world’s largest commodities importer as well as largest exporter of finished goods, heightening its exposure to the so-called Malacca trap by which its physical trade depends on the narrow chokepoint of the Strait of Malacca passing between Singapore and Indonesia over which it has no control.  Its aggressive maneuvers in the South China Sea are an effort to at least secure the waters on the eastern side of the strait, as it cannot control the Indian Ocean—which Belt and Road projects in Myanmar, Bangladesh, and Pakistan are meant to enable overland access to.  And as China’s trade rapidly expands with the European Union (with whom China trades $500 billion more per year than it does with the United States) and the Arab world, it’s only logical that it would seek overland corridors toward Europe and the Gulf region of West Asia, too.

However, commentators who portray China as having a thousand-year vision and presume an unwavering path to its achievement both overstate China’s wisdom and underestimate that of its neighbours, who have thousands of years of historical engagement with China.  China today seems an unstoppable force—but Asia is full of immovable objects in the form of civilizational states such as Russia, Iran, and India, whose ancient histories allow them to stand up to China whenever it suits their interest to do so.  China dares not trespass on Russian soil even as the two increasingly coordinate their military exercises, and Iran has shown little remorse in cancelling Chinese oil contracts despite its dependence on China to withstand Western sanctions.  The 2017 Doklam Plateau standoff between India and China was similarly instructive, for it was China that blinked first, withdrawing its army and suspending some of its controversial road construction activities in disputed Himalayan terrain.  China is known to play the long game—now so, too, is everyone else.

China bears the additional burden of having to juggle a bewilderingly complex 360 degree array of neighbours all at the same time.  China shares borders with 14 countries, a reminder that throughout history, it has far more often been invaded than been the invader.  China has not been immune to defeat at the hands of Arabs, Turks, Japanese, and Europeans, and been forced to stalemate by Russia and Vietnam.  Today it is all too keenly aware that even if its high-tech but untested and inexperienced military were to swiftly defeat a neighbour, the cost in terms of diplomatic blowback from other neighbours would be severe.

This is a reminder that even with all of China’s investments in military modernization, there it is little reason to believe it will purchase any more political leverage beyond its immediate periphery than America’s mighty forces have in Iraq and Afghanistan.  From the South China Sea to the Indian Ocean, China’s naval footholds, access points, and probing have awakened multidirectional countermeasures in the form of new coalitions such as the Quad (made up of the United States, Japan, India, and Australia) and smaller powers they now back such as Vietnam and Indonesia.  Littoral powers are thus crowding in across the Indo-Pacific to make clear that none should dominate.  Even if China builds the modern military equivalent of the its fabled 15th-century Treasure Fleet, it will never dominate maritime Asia.  A much talked about restoration of the Ming-Qing tributary system is not Asia’s most likely scenario.

In defiance of superficial colonial analogies used to describe China’s behaviour, today’s world features deterrence and sovereignty, democracy and transparency, instruments and forces that severely restrict China’s ability to dictate affairs.  Consider again the Indian Ocean, where China has made significant commercial and diplomatic inroads from Sri Lanka and the Maldives to Pakistan and Kenya.  In Sri Lanka, a near-default situation led to China taking control of the Hambantota Port that China itself built on a 99-year lease.  The issue has become so central to the country’s politics that no leader, not even Chinese-backed former Prime Minister Mahinda Rajapaksa—now opposition leader after a failed attempt to unconstitutionally depose the government in December—could conceivably bow any further to China if he eventually returns to power.

Source: https://foreignpolicy.com/2019/02/03/china-couldnt-dominate-asia-if-it-wanted-to/

 

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Caixin Survey: China’s Manufacturing Shrinks at Steepest Pace in Nearly Three Years

This item from the Caixin site provides insights into what each of the different China PMI and other indices report on.  Broadly the Chinese indices are reporting on slower growth (approximately two -three year lows, which may be stabilising, as the economy grows at its slowest rate in 28 years.

 

Chinas’ growth rate was always forecast to slow as the economy has been grown to become one of the world’s largest, so the fact that growth is slowing is not terrible, unless someone is planning for growth to remain constant.   Remember that the major developed economies (USA, Europe, Japan) consider say +3.0% to +4.5% p.a. to be healthy manageable growth rates … China at ~ +6.5% is still operating at a high rate.

Feb 01, 2019 09:45 AM

ECONOMY

Caixin Survey:  Manufacturing Shrinks at Steepest Pace in Nearly Three Years

By Lin Jinbing

China’s manufacturing activity contracted at the steepest pace in nearly three years in January, with weak domestic demand blunting the effect of improved foreign demand amid positive signs in Sino-U.S. trade talks, a Caixin survey showed Friday.

The Caixin China – General Manufacturing Purchasing Managers’ Index (PMI), which gives a snapshot of operating conditions in the manufacturing sector, dipped to 48.3 in January from 49.7 the previous month, marking the weakest level since February 2016.  The Caixin index, one of the earliest available monthly indicators showing China’s latest economic conditions, is closely watched by investors. A reading of 50 divides expansion from contraction. The higher above 50 the faster the expansion, while the further below 50 the greater the contraction.

The downbeat PMI data came after the world’s second largest economy grew at its slowest pace in 28 years in 2018, amid a debt-cutting campaign and the ongoing trade conflict with the U.S.  “On the whole, countercyclical economic policy hasn’t had a significant effect,” said Zhong Zhengsheng, director of macroeconomic analysis at consultancy CEBM Group, a subsidiary of Caixin Insight Group.  Over the past months, Beijing has made multiple efforts such as increasing government spending and cutting taxes in a bid to counter economic headwinds.

In January, new export orders received by manufacturers increased for the first time since March, when the U.S. threatened to levy additional tariffs on Chinese products following an investigation into China’s intellectual property practices.  Zhong attributed the uptick in foreign demand to the recent truce in the China-U.S. trade war.

Yet amid muted domestic demand, total new orders decreased at the steepest rate in 40 months, while manufacturers’ production declined for the first time in 31 months, the survey showed.  Soft demand also led to the first reduction in purchasing activity for 20 months.

On a positive note, the gauge for business confidence toward the 12-month outlook for production remained in expansionary territory and continued to rise, hitting its highest point in eight months.  The employment subindex edged up despite staying in contractionary territory, reaching its highest level in nine months, according to the survey.  China has recently issued multiple preferential policies to stabilize the job market, including cash rewards for companies that lay off zero or few workers.

“China is likely to launch more fiscal and monetary measures and speed up their implementation,” Zhong said.  “Yet the stance of stabilizing leverage and strict regulation hasn’t changed, which means the weakening trend of China’s economy will continue.”

China’s official manufacturing PMI, released by the National Bureau of Statistics on Thursday, picked up to 49.5 in January, just off a 34-month low of 49.4 the month before.   Manufacturing accounts for roughly 30% of China’s gross domestic product (GDP), according to official data (link in Chinese).

The Caixin manufacturing PMI, sponsored by Caixin and compiled by data analytics firm IHS Markit Ltd.,  focuses on light industry,
while the official survey focuses on heavy industry.
The geographic distributions of the companies covered in the two surveys are different.

The Caixin China General Services Business Activity Index for January, which tracks the growing services sector, will be released on Sunday. The services sector, also known as the tertiary sector, contributes more than half of China’s GDP.

Contact reporter Lin Jinbing (jinbinglin@caixin.com)

Commentary: China’s trade data weak? Not if you look at commodities

This is an  article by Clyde Russell / Reuters, which among other things, highlights in importance of appropriate analysis of data.  Matau Advisory has noted that several data series suggest that China is growing well, but appear to be unsupported by other data (that we have yet to see) viz: electricity demand and freight traffic (not discussed below) are continuing to grow strongly … appropriate follow up questions include: what is beign transported?, how is electricity being consumed, and inevitably, China appears to be advancing down the path to a consumer economy more than many commentators recognise. 

 

Clyde Russell

LAUNCESTON, Australia (Reuters) – Anybody reading the commentary on China’s December trade figures would be left with the impression of an economy increasingly losing momentum amid a dispute with the United States.

It was reasonable for analysts to zero in on the 4.4 percent drop in China’s December exports from a year earlier, a huge miss when a rise of 3 percent had been forecast.

Imports also surprised on the downside, dropping 7.6 percent in December, the biggest decline since July 2016.

The numbers do point to weakness in the world’s second-largest economy, and the trade dispute with the administration of U.S. President Donald Trump is getting much of the blame.

The weakness in exports could be put down to the pull-forward effect in prior months as both producers and buyers stocked up ahead of the imposition of U.S. tariffs on a range of Chinese goods.

The poor trade numbers also came despite efforts by Beijing to stimulate the economy in a series of measures, from looser credit to tax cuts to infrastructure spending.

The trade data was grist to the mill for those taking the view that China’s economy is struggling, that the United States is “winning” the trade dispute, and that Beijing will be forced to compromise on Trump’s terms.

This may well turn out to be the case, but there are also trade numbers that paint an entirely different view of the Chinese economy, namely the volume of commodity imports.

Crude oil imports surged nearly 30 percent in December from the same month in 2017, reaching 10.31 million barrels per day (bpd), the second-highest monthly outcome on record.

That hardly sounds like a weak outcome, even if the likely explanation is that smaller, independent refiners boosted purchases to use up 2018 import quotas before they expired.

Overall, China’s 2018 crude imports rose by 10.1 percent to a record 9,24 million bpd, an increase of 846,000 bpd over 2017.

Boosting annual crude imports by the equivalent of the total consumption of a country such as Netherlands cannot be construed as weak either.

A history lesson on past-year crude imports, though, doesn’t say much about what’s likely to happen in 2019, but so far there is little reason to expect the imports to tail off.

China is still building its strategic petroleum reserves and the sharp drop in crude prices in the previous months is likely to encourage more buying for storage.

It’s not just crude oil. Imports of natural gas, by pipeline and as liquefied natural gas (LNG), hit a record high of 9.23 million tonnes in December, up 17 percent from the same month of 2017 and eclipsing the previous record high from November.

That means China has imported record amounts of natural gas for two consecutive months, again, hard numbers that don’t quite tally with the view of an economy in distress.

ENERGY, METALS DIVERGE?

It could be the case that energy imports are staying strong, while those of metals, which are more exposed to weakness in manufacturing, are feeling more pain.

Imports of unwrought copper dropped to 429,000 tonnes in December, down 4.7 percent from the same month in 2017 and by the same margin from November.

Imports in November were also weaker than in the same month in 2017, indicating some softness toward the end of the year, notwithstanding the strong 12.9 percent gain in copper imports for 2018 as a whole.

Iron ore imports also look uninspiring, with December’s 86.65 million tonnes up 3 percent from the same month a year earlier, but not enough to prevent a 1 percent drop across 2018 as a whole, the first annual decline since 2010.

However, China’s steel output is likely to hit a record high in 2018, with output for the first 11 months rising 6.7 percent to 857.37 million tonnes from the same period in 2017.

What this shows is that China’s switch to higher-grade iron ore in order to maximise the output of blast furnaces meant steel mills were able to boost production without having to import more iron ore.

Again, this is hardly a weak outcome, but likewise doesn’t shed much light on the probable trends for 2019.

Coal was one commodity that looked weak in December, with imports plunging 55 percent from the same month in 2017 to just 10.23 million tonnes.

But this was entirely policy driven, with Beijing putting pressure on traders to curb imports as they didn’t want total inbound coal shipments in 2018 to exceed those for 2017.

Despite the slump in December, imports for the full year were up 3.9 percent to 281.23 million tonnes, a four-year high.

Coal imports may remain restrained in the early months of 2019 amid an official push to use more domestic coal to boost prices for local miners.

Overall, if you were to assess the Chinese economy on its commodity imports, you’d likely reach quite a different conclusion than if you focused only on the U.S. dollar value of total exports and imports.

Weaker commodity prices lowered the value of imports in the latter part of 2018, but if anything, also served to boost volumes.

China’s economy does appear to be losing some growth momentum, but it doesn’t seem to make much sense to look only at imports and exports from a dollar perspective, and not take volumes into account.

(Graphic: China’s trade and economy: tmsnrt.rs/2iO9Q6a)

The opinions expressed here are those of the author, a columnist for Reuters. 

Editing by Tom Hogue

Our Standards:The Thomson Reuters Trust Principles.

 

Source: https://www.reuters.com/article/uk-column-russell-commodities-china/commentary-chinas-trade-data-weak-not-if-you-look-at-commodities-idUKKCN1P91K4

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USA – historical view of Yield & Interest Rate Curves

The history of almost three decades of USA yield and interest rates, as shown above, highlight a risk that when interest rates invert, particularly when 3mo yields/rates exceed 10 yr yields, a downturn often follows.  While several in the markets have expressed concerns that the USA yield curves are flattening, they currently do not appear to be close to inverting.

Another viewpoint on yield curves is expressed as the margins or differentials between long-duration and short-term rates.  When (parts of) yield curves invert, the short term rates exceed the long term rates and the differentials (long less short) become negative.

It is interesting to note that for the 2008-09 financial crisis, the USA 10yr-2yr  yield differential fell below zero in early 2006, which was at the same time that USA Residential Construction Spending yr-on-yr growth rates peaked (January 2006) and turned downward, well ahead of the wider recognition of the financial crisis in Sept-Oct 2008.

We consider that the USA indicators are not currently foreshadowing a comparable risk of downturn, though draw attention to historical data signals that bear watching closely.

As has been said before, history does not repeat itself, but it often rhymes.

 

Codelco Almost Sold Out of Cu supply on Strong China Demand

  • Top Copper Miner Almost Sold Out on Strong China Demand – Chinese copper demand has been so strong in the past few months that top producer Codelco has almost sold out of supplies for next year, well ahead of schedule, according to the chairman of the Chilean state-owned company.  “It’s extremely strong, not only China. It’s extremely strong around the world,” Juan Benavides, who took over as chairman of Codelco in May, said in an interview in London.  The wave of buying comes as prices have fallen 15 percent this year amid fears that a trade war between the U.S. and China could stifle global growth.  “The trade war is not good at all,” but “demand is strong, inventories are low, supply is not growing as much as demand,” he said.  He sees prices rising above US$3 per pound (US$6,612 a tonne) as demand outpaces supply, reports Bloomberg.

Copper metal exchange inventories currently represent rougnly 1x week’s consumption.  This is fundamentally tight!  However to date sentiment has been focused on fears that the trade wars, tariffs and sanctions would reduce demand for commodities.  China’s behaviour in effectively buying out supply from one of the world’s largest suppliers says that China does not want its growth to be constrained.

BHP has also recently been making very positive outlook statements about the anticipated demand for copper tht may arise from China’s Belt-Road Initiative (BRI).

USA Construction Spending 2018095 – looking back in time to the 2008 GFC

USA Construction Spending for July recorded +5.8% yr-on-yr growth, which is quite strong growth, and consistent with rates over the past 3-4 months. This is reflecting current ongoing steady and strong economic growth in USA, accelerated somewhat by stimuli from Washington, which have been described by some economists as unnecessary.

What is interesting however is looking back in time and noting that Residential Construction Spending peaked and decisively turned down in February 2006, well ahead of the sharp decline of the global financial crisis (12 September 2008 when short term US interest rates also recorded a dive).  Non-Residential Construction Spending did not peak till November 2008 (roughly when 10 yr bond yields reduced).

Those involved in new house construction had clearly decided to pull back on spending in that segment approximately 18-24 months prior to the financial crisis actually being recognised and hitting the wider markets.  … Surprisingly, much of the market had expressed no great sense of alarm at the time until the September quarter of 2008.

The financial mess that was the loans approval systems, and other financial instruments, related to the USA housing construction sector was truly only a ‘financial’ crisis, (similar in a sense to the 1987 financial crisis, related to over-valuation of shares).

What changed the level of the crisis was when banks no longer had confidence in lending to each other, and for example, stopped issuing letters-of-credit.  The ‘financial‘ crisis then morphed into an ‘economic‘ crisis, as the inability to obtain letters of credit meant that, among other impacts, producers selling mineral concentrates, or other products, who normally obtained a letter of credit to ensure payment upon arrival and receipt of goods, and ship owners who would obtain a letter of credit to ensure payment upon discharge of cargo at destinations, could not get those (bank-backed) letters assuring payments.

The 2008-9 crisis actually stopped trade!  That is where the comparison with the 1987 crash differs; the 1987 trade in products, minerals and metals barely missed a beat, with ‘industry not suffering greatly.  Consequently the somewhat bruised share markets were able to recover in a relatively short few years.

Fortunately the current levels and trends of US housing construction are not suggesting that any crisis is looming

There have been some mutterings about the finance approvals for US vehicle sales, which had recovered faster and further than housing in the USA.   Residential Construction peaked at USD 683,903m in January 2006, and has recovered so far to USD 566,595m as at July 2018.  Housing Starts peaked at 2.3 million units in January 2006, and by May 2018 had recovered to 1.8 million units while Orders-to-Vehicles had peaked in July 2007 at USD 44,810m and as at July 2018 was well past this at USD 60,117m.   (I do not expect that orders to vehicles (part of the Durable Goods manufacture grouping, will include imports).  However I have no further particular insights into vehicle finance approvals in the USA at present.

USA Construction Spending – Residential & Non-Residential. Source: USA Bureau of Census, Matau Advisory
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Zinc pinch-point graph

A ‘pinch-point‘ is the level of inventories of a commodity or product below which consumers of that commodity or product become concerned about security of supply.  When inventories are below the pinch-point, small changes in the balance of supply and demand can cause large changes in the price of the commodity or product.
Inventories are best expressed as a ratio of a period of consumption, say as days, weeks or months of consumption, rather simplistically as tonnes.  That ratio then puts the absolute size of inventory into context with market demand.
Each commodity market becomes ‘tight’ at its own (low) level of inventory. The position of the pinch point curve may shift according to the economics of each cycle, that influence at what level a market is considered ‘tight’.

Teck (20180226) presented data for two recent cycles of tightening zinc markets illustrating that each cycle may travel a different path, but perform a similar pinch-point shape.

Several major zinc mines closed in the last 4-5 years, as their Reserves were exhausted.  To date we have not seen sufficient potential new mine supply to indicate that the closed supply volumes will be replaced in the near term.  There are also no known ‘major’ new deposits able to come on line within the next 6-10 years, the minimum time it takes to discover and develop a new major mine now.  Industry analysts also consider that the sum of all the potential new ‘small’ deposits is insufficient to replace the recent major closures. The outlook for zinc is one of tight supply.

Additionally, for those that believe that the advent of electric vehicle (EV) uptake will mean a near term demise of demand for lead-acid batteries will result in significantly lower prices for lead, the fact that lead is often a co-product or by product of zinc production might reduce the economics of some Zn-Pb mines. This means that confidence in the economics of a zinc mine could be best assured if it is (a) Zn only, or (b) Zn-Cu, rather than Zn-Pb and is reliant on Pb for economic development.  This could mean a shift to a preference for targeting either ‘sedex’ (sedimentary hosted) or VMS (volcanogenic massive sulphide) deposits.

However the range of forecasts for uptake of EVs ranges widely, with some more conservative participants (BHP, Wood Mackenzie et al) forecasting continued growth in Pb-Acid battery demand, albeit slower, to 2030 or 2040, with EVs achieving a 40% share of the global light-vehicle market in those time frames.   Forecasting high growth rates is always difficult, particularly matching high growth forecasts of supply and demand.  We expect the ramp up phase(s) will have volatile pricing.