Materials Outlook:   Factor Cost Implications for Chinese Hardlines December 2011 

 

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Sertus Research Materials Outlook 1-877-6-SERTUS Factor Cost Implications for Chinese Imports info@sertusllc.com December 2011

2012 Global Outlook

Economists have been downgrading forecasts for 2012 almost without exception. Risks continue to be skewed to the downside (especially considering the crisis unfolding in Europe), favoring a more cautious outlook for next year. Should the euro break up, the consequences to the global economy will be far more significant than any of the other crises of recent memory. All of this poses little upside for commodities, favoring from a factor cost standpoint, a more stable inflationary environment for Chinese goods. Currency Markets Through November, the RMB has appreciated against the USD by roughly 3.7% in 2011 and is expected to continue to appreciate through 2012 at an even brisker pace. Risk aversion, deleveraging and global liquidity also bode well for USD performance (certainly as it relates to 2011). Because most all commodities are priced in dollars, any rise in the USD (while not having an impact in real terms), will weigh on nominal prices. Together with expected RMB appreciation vs. USD, this bodes well for raw material inputs for Chinese goods.

Base Metals Base metals are highly cyclical and tend to sell off sharply during global slowdowns. While we have seen a modest correction already, history suggests plenty of downside risk remains. We look at the implication of each of the key base metals that form an important role in raw material inputs for hardlines manufacturers in China. Copper (Cu): The global inventory pipeline for copper continues to be depleted and relief is not anticipated for at least a few more years. Global copper production growth already faces several structural problems (lower grades, increasingly complex new projects, adverse weather conditions and enhanced geopolitical risks). On the demand side, there is much uncertainty given weak manufacturing, contraction in balance sheets and limited credit availability. As the world’s largest consumer, the demand scenario in China will play a

large role in determining price. The combination of low Chinese domestic inventories and a 5-month trend of higher imports suggests China will continue to re-stock copper in 1H12. Yet even if demand slows, the supply side restraints mentioned earlier should continue to show price support. We would not be surprised to see Cu trading above RMB68,000 per MT in the run up to Chinese New Year and possibly topping RMB70,000 as the restocking efforts continue.

Aluminium (Al): About 85% of the Al inventories worldwide are tied up in inventory financing deals, making the supply conditions much tighter than they would otherwise be. With longer dated deals offering more attractive yields, the impact on supply from inventory financing should last well into next year. Aluminum prices have also been below the marginal cost of production since August of this year, which also is supportive for price as we move into 2012. On the demand side, China’s turnabout in 2009 to become a net importer of Al is still driving demand. While the auto and construction sectors have been traditionally strong drivers of demand in China, use in the packaging sector is set to increase. Growing demand, combined with rising power costs, government restrictions on energy-wasting industries and reduced availability of funding for energy-intensive projects all favor an import driven Al supply that will be on the whole supportive for price in 2012.

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Sertus Research Materials Outlook 1-877-6-SERTUS Factor Cost Implications for Chinese Imports info@sertusllc.com December 2011

Steel

With the global economy cooling and construction reeling from soft demand, it is expected that demand for steel will continue to show signs of weakness. Although prices bounced in September of 2011, the market has since corrected and it is anticipated that as we move into 2012, global supply will continue to outweigh demand, keeping prices down.

Freight

After climbing from lows in July not seen since 2010, the China Containerized Freight Index (CCFI) peaked in September and has since been on a steady decline, now at its lowest point since 2009. Many analysts believe shipping costs are bottoming out and that the anticipated increase in export volume over the next several months in the run-up to Chinese New Year, could result in a repeat of last year’s container shortage pushing up costs.

There is concern whether the projected growth in cargo capacity is going to be able to meet the anticipated rise in exports. A shortage of containers is possible although not as severe as last year.

While customs statistics show China exports in the first three quarters of 2011 were up over 20% year on year, the trend is clearly slowing. In October, exports rose at the slowest pace in almost two years as Europe’s deepening debt crisis has provided a strong headwind on demand. The trend deteriorated even further in November and analysts are now calling into question their already reduced GDP numbers for 2012. It is bound to be a very difficult year.

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